Vancouver’s pension costs, expressed as a percentage of revenue, were the lowest among 173 cities in a national study by the Center for State and Local Government Excellence.
In its study, “Gauging the Burden of Public Pensions,” the Washington, D.C., nonprofit organization wanted a more comprehensive look at how much residents pay for pensions in relation to other government costs.
To achieve that, researchers considered state and local pension costs for school districts within city limits as well county pension costs. Related portions of school district and county budgets were added to the city budget to calculate a total city revenue base.
“This approach is interesting, because the future of cities is a crucial concern, and it is important because focusing solely on city plans ignores a large percentage of the pension costs borne by city taxpayers,” the study said.
On average, pension costs accounted for 7.9 percent of revenues.
They accounted for 1 percent in Vancouver, ranked 173rd.
Little Rock, Ark., had the highest cost, with pensions accounting for 17.6 percent of revenues, followed by Chicago; Aurora, Ill.; Charleston, W. Va.; and Reno, Nev. Portland ranked 10th, with pensions at 13 percent of total revenues.
The city of Detroit, which cited pension costs among its reasons for filing for bankruptcy this year, ranked 61st at 7.7 percent. It didn’t rank higher, the study noted, because it issued pension obligation bonds in 2005-06, “which increased its overall borrowing costs but reduced its reported pension expense.”
Spokane, Seattle and Tacoma were included in the study and ranked 90th, 118th and 149th, respectively.
Unlike Vancouver, which participates in the state retirement system, the state’s three largest cities operate their own retirement systems for general government employees, said David Brine, communications director for the state Department of Retirement Systems.
According to the study, the nation’s largest cities “tend to administer their own plans, (so) additional large cities that participate in state plans were added to the sample in order to capture the variation on pension organization across localities.”
Not ‘the major expense’
The study relied on annual required contributions, as listed in 2010 Comprehensive Annual Financial Reports, as well as city contributions to state plans, county government contributions and independent school district contributions to state teachers’ plans. It noted that pension financing varies across states, and pension “costs as a percent of revenue vary enormously across cities.” Among cities in the top one-fifth, pension costs averaged 12.3 percent of total revenue. In the bottom fifth, the average was 2.7 percent.
The study concluded the burden of public pensions has been overstated, but some large cities still have “seriously underfunded” plans.
“Stories in the popular press suggest — particularly in the wake of the bankruptcy of Detroit — that pensions are the major expense of American cities and will lead to their widespread collapse,” says the introduction of the study, written by Alicia H. Munnell, Jean-Pierre Aubry, Josh Hurwitz and Mark Cafarelli.
The study concluded “that pension costs are closer to 5 percent of revenue than to 50 percent for cities, even in the wake of two financial crises and the Great Recession. However, in those cases where pensions are both expensive and underfunded, such as Chicago, they exacerbate fiscal problems,” the authors wrote.
Bob Williams, president of State Budget Solutions, a Glen Allen, Va.-based nonprofit public policy organization, reviewed the October study at The Columbian’s request.
“I don’t see any glaring issues that would skew the rankings,” Williams wrote in an email. “They seem to incorporate all plans. One issue is that they base contributions on the annual required contribution, not actual contributions. So with their higher costs, some of the other Washington cities may not be meeting their ARC, but I don’t know for sure. It is also worth noting that contributions are calculated based on high assumed rates of return. If those returns are not met, costs will not be enough to fund the system,” Williams wrote.
Aware of the risks
Lloyd Tyler, Vancouver’s chief financial officer, said there could be a scenario in which state actuaries’ estimates on earnings aren’t met, resulting in a need to increase employer and employee contributions to meet the pension obligations.
“But that’s always a risk,” he wrote in an email.
Tyler said the city’s pension costs have hovered near 4 percent of the city’s general fund in each of the past six years.
“The city’s pension costs are at a very manageable level,” he said.
A Nov. 5 article in the Wall Street Journal said the “median spending on pensions among the country’s 250 largest cities rose to 10 percent of general budgets in 2012, up from 7.75 percent in 2007,” citing data from Merritt Research Services LLC that didn’t factor school districts and counties.