A more than $200 billion gap exists between what America’s most populous cities have promised their workers in pensions and retiree health care and what they have saved, according to a new Pew Charitable Trusts report.
The most populous city in each state, as well all others with more than 500,000 people emerged from the Great Recession with a gap of more than $217 billion, the report states. For pensions, these cities had a shortfall of $99 billion in fiscal year 2009, the most recent year with complete data.
“Besides pensions, many localities also have promised health care, life insurance, and other non-pension benefits to their retirees, but few have started saving to cover these long-term costs,” Pew concludes. Unfunded liabilities for retiree health care exceed those for pensions. As of fiscal year 2009, the cities surveyed in the report had promised at least $118 billion more than they had to cover current and future retirees. Cities had set aside enough money to cover 6 percent of their obligations, compared with slightly more than 5 percent in states.
Overall, the cities had enough money to cover nearly three-fourths (74 percent) of their \pension obligations in fiscal year 2009, compared with 78 percent for states. Some cities earned high marks for pension preparedness. Milwaukee and Washington, D.C. had surpluses at the end of fiscal year 2009, with enough money to cover 113 percent and 014 percent, respectively, of their liabilities.
At the other end of the spectrum, the pension systems in Charleston, Omaha, Portland, OR, and Providence, RI were found to be more poorly funded than those in Illinois, which at 51 percent was the lowest-funded state.
Beyond the personal cost to the employees, cities risk seeing their credit ratings diminished if they are deemed undisciplined about funding their retirement benefits, whether because of missed payments or borrowing from the reserves. Some city governments are, in essence, robbing Peter to pay Paul by dipping into funds used for other city services such as libraries, schools and public safety. This could lead to reduced municipal services, program cuts, and raised taxes to cover the shortfall.
Among the steps some cities are taking to reform their systems including trimming benefits they offer (especially to new employees), raising the retirement age, or reexamining their use of traditional defined benefit pension plans that guaranteed income for life.