Cities and their Bankrupt Pension Plans

A recent study, published by Northwestern’s Kellogg School of Management, found shocking statistics about the solvency of most city and state pension funds. The total unfunded pension liability for all municipal plans in the US came to an enormous $574 billion, include states and the tab tops $3 trillion. The study averaged the cities together and found that in order to pay for these pension liabilities, each American household owes on average $14,165.

The study then estimates how long pension assets are adequate to pay for accrued benefits—or how long until individual cities go bankrupt. Philadelphia tops the list of U.S. cities, projected to run out of funds by 2015. Philadelphia was the only PA city used in the study, because Pittsburgh’s pension are in worse shape than Philadelphia‘s in terms of unfunded liabilities.

A glimpse of hope occurred when Philadelphia Mayor Michael A. Nutter stated that guaranteed pensions are unsustainable and that he wanted to replace pensions with defined-contribution plans, like a 401(k).

Likewise, Pittsburgh is looking for ways to address its municipal pension crisis, with about $1 billion in future pension liabilities that is only 27% funded. Pittsburgh is heading inexorably toward a period of either much higher taxes or facing up to the need to make serious cuts in spending to free up at least $30 million per year to pour into pensions.

Pittsburgh Mayor Luke Ravenstahl proposed leasing out city-owned parking meters and facilities to address the pension crisis, but the City Council rejected the idea due to fear of increased parking rates. Now the city is looking into Plan B, specifically a state takeover under the Pennsylvania Municipal Retirement System (PMRS), in which the state would manage the plan and require much higher contributions from the city. As the Allegheny Institute writes:

Early in the process the Mayor stated that a takeover “…would require either unacceptable tax increases to the residents of the City of Pittsburgh or immediate, wide scale reductions across City departments”. The administration later specifically quantified the takeover as necessitating a 22 percent property tax increase, a 44 percent wage tax increase, or a layoff of 400 police officers.

The idea is that the PMRS will work with Pittsburgh to bargain down benefits and eligibility requirements, as well as cut down on costs and raise revenue for the city. But the fear is that state taxpayers will be called upon to bail out city pensions. With Harrisburg recently setting the precedent for cities receiving state funds when faced with bankruptcy, Pittsburgh and Philadelphia may soon follow suit.

The study’s authors conclude that unless the liabilities are taken care of, local pension debt will likely flow upward to the states. States, already facing budget woes, will then turn to the federal government leading to “a debt crisis of some kind for a subset of U.S. state and local governments.”