January 31, 2013
How broke are America’s
cities? A new
report by The Pew Charitable Trusts examined the unfunded liabilities of 61
municipalities. The findings are deeply disturbing.
generous retirement benefits bestowed by detached-from-reality pols have accrued
a tab in the hundreds of billions of dollars. In fiscal 2009, the most recent
year for which complete figures are available, the 61 jurisdictions, employing
45 percent of the nation’s city employees, had only 74 percent of the assets
necessary to cover pension obligations. The shortfall: $99 billion.
Pew’s pension analysts
documented both penny pinchers and spendthrifts. Among the champs: Milwaukee (113 percent), San Francisco
(97 percent), Wichita (94 percent), and Indianapolis (94 percent).
The irresponsibility club featured Charleston, West Virginia (24 percent), Providence
(42 percent), Omaha (43 percent), and Portland, Oregon
the pension pickle is common. Less visible is the bill for other postemployment
benefits (OPEB). Primarily retiree healthcare coverage, Pew concluded that for
this commitment, “cities had set aside just 6 percent of $126.2 billion in
projected costs … leaving $118.2 billion in unfunded liabilities in fiscal year
there were heroes and zeroes. Los
Angeles began to squirrel away revenue for its OPEB in
1987. Denver, Louisville,
and Sioux Falls
are at the front of the pack as well, while 33 cities have saved nada, and are “paying for their
retirees’ health care out of their treasuries on a pay-as-you-go basis.”
It didn’t have
to be this way. Decades ago, municipal officials and state lawmakers could have
recognized the changing compensation environment, and taken action. First on
the to-do list would have been conforming the wages/salaries of city workers to
counterparts in the competitive, accountable sector. Such a shift would have greatly
reduced pension expenditures, since retirees’ monthly loot is based on what was
received during the last several years on the job.
Chicago (pension funding: 52 percent) provides
an instructive example of inequity. The latest research from the National Compensation Survey,
which collected Windy City-region data in 2010 and 2011, revealed that the
hourly rate for employees in state and local government was $31.89. At $22.20,
private workers didn’t measure up. (For service jobs, the disparity was
massive: $23.38 vs. $11.29.)
Putting a halt
to “retirements” before the age of 65 would have been another wise tactic. So
would a ban on pension “spiking,” the sleazy practice of employees using
overtime and paid leave to artificially inflate earnings. Pew’s study includes
an anecdote about a 50-year-old West
Virginia police lieutenant who spent three years
manipulating his wages in order to boost his annual pension from $33,000 to
$53,000. The scheme potentially put the Mountain State’s taxpayers on
the hook for an additional $574,000.
A bolder change
would have been the end of defined-benefit plans for new hires. Defined-contribution
systems leave no unpredictable fiscal legacy, and are more aligned with the
modern labor market’s high degree of mobility. Some didn’t wait to move to
401(k)s: “As long ago as 1981 in Little Rock and
1987 in Washington, D.C., all new non-uniformed … employees were
enrolled in defined contribution plans.” The past few decades have seen a smattering
of cities follow suit -- not nearly enough to have a significant impact on the
total unfunded-pension monstrosity.
The scale of
the OPEB problem wasn’t fully known until this century, when the Governmental Accounting
Standards Board mandated disclosure of the liability. Now that the severity
of the crisis is known, reforms are essential. Boosting employee contributions is
an obvious approach. Stopping post-employment healthcare altogether is better.
(Portland, Maine doesn’t offer the perk.) Those already
drawing benefits can be a source of savings, too. Jersey City, reports Pew, “voted to shift
retirees to a new health plan that caps payments to medical providers, unless
retirees opt to pay the difference in premium costs to stay with their current
exceptions, high-population municipalities face declining
or stagnant populations. Drug prohibition, welfare, high taxes, and
political corruption have rendered the places unlivable, and thus incapable of raising
the revenue needed to meet immense financial burdens.
So it’s all
but certain that mayors will descend on state legislatures and D.C. for help.
The enormously powerful unions that “represent” policemen, firemen, social
workers, educrats, and other municipal employees have the forced-dues dollars
to fund aggressive agitprop and fight effective lobbying campaigns.
don’t work for cities, but most Americans aren’t farmers or
or employees of the United
States Postal Service. In Bailout Nation, everyone gets a subsidy
D. Dowd Muska (www.dowdmuska.com) writes about government, economics, and technology. Follow him on Twitter @dowdmuska.
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