By Lisa Lambert
WASHINGTON, Jan 15 (Reuters) – States are not alone in
racking up massive public pension bills: U.S. cities need
hundreds of billions of dollars to make good on their promises
of retirement healthcare and income to workers.
The Pew Center on the States surveyed 61 cities – the most
populous ones in each of the 50 states, along with those of
populations greater than 500,000 – and found a gap of $217
billion for all retiree promises in fiscal 2009. For pensions
alone, they were short $99 billion.
“Many cities are facing severe fiscal challenges in their
retirement obligations,” said David Draine, senior researcher at
Pew. “Fulfilling the retirement obligations cities have already
made can have a significant impact on cities’ budgets. Some
cities have been forced to move toward either cutting spending
on services or increasing taxes.”
Altogether, 74 percent of the cities were able to cover
pension obligations, compared with 78 percent for states.
Pew found that 37 cities had pensions with funding levels
below 80 percent, the demarcation that many use to determine a
system is “underfunded.”
Charleston, West Virginia, was 24 percent funded, the lowest
level of all the cities. Omaha, Nebraska, Portland, Oregon and
Providence, Rhode Island were all at 50 percent or below.
On the flip side, Milwaukee and Washington, D.C., both ran
surpluses and Cheyenne, Wyoming, Indianapolis, San Francisco,
and Wichita, Kansas, were above 90 percent.
The pension in Los Angeles was 89 percent funded, higher
than in other metropolitan monoliths New York, 70 percent
funded, and Chicago’s 52 percent.
In a previous report, Pew found that states are short $757
billion for pensions and most of the political attention has
focused on how states will address the massive holes. Illinois
has the lowest funded pension system in the country.
The largest pensions, representing 90 percent of public
retirement systems, have marched back to health since their
holdings reached a low of $2.1 trillion in 2008, according to
the U.S. Census. A rising stock market helped push their assets
to $2.8 trillion in the third quarter of 2012.
Still, political leaders and taxpayers worry that states
will lack the billions of dollars they need for retiring members
of the “Baby Boom” generation. Because most states consider
pensions a fixed promise bound by contractual law, they could
have to pull dollars from other areas to cover the costs.
Cities face the same dilemma, but with an added wrinkle:
they can file for bankruptcy. For the last few years, pension
problems have pushed many towns in Rhode Island to the brink of
going broke.
“Not only are taxpayers in these towns dealing with fiscal
challenges, but retirees found their pension checks reduced,”
said Draine.
The financial crisis exacerbated cities’ retirement system
problems, given that investments provide the lion’s share of
public pension revenues. But the true source of cities’
struggles comes from their not contributing enough money to the
funds or not structuring the systems well enough to pay for all
the promises made to workers, Pew found.
“Most of the cities that exited the recession with the most
profound pension problems were already in trouble when they
entered it,” according to the report. It found in fiscal 2007
that pension systems in 27 of the 61 cities were already below
80 percent funded.
That means that data from years after fiscal 2009, which
ended for most places in the middle of 2009, will likely show
the problem persists. When Pew looked at fiscal 2010, it found
the gap widened for the 40 cities where complete data was
available.
Still, the National Conference on Public Employee Retirement
Systems, which advocates for public pensions, said the report
was outdated and looked at a unusual period of time, after a
large stock market collapse.
The report “may provide a valuable history lesson, but it
cannot yield a realistic representation of the status of
municipal pension plans today,” NCPERS Executive Director Hank
Kim said in a statement. He added that in a recent survey his
group found “local pension funds are continuing their strong
recovery from the negative impacts caused by the Great
Recession.”
Cities use a variety of pension systems. Some participate in
their states’ funds, while others are wholly independent. Not
all public employees can collect Social Security, making their
pensions their primary support in retirement.
“Across the 61 cities, plans managed by cities for their own
employees had on average 66 percent of the money needed in the
long run, compared with an average of 79 percent for
state-administered and statewide plans that covered city workers
and others,” Pew found.
Cities also have only recently begun putting aside money for
healthcare. The promises to provide health coverage in
retirement are relatively new and cities’ systems for funding
them are not as advanced as those for pensions.
