Political, popular hurdles block pension changes

A look at pension problems, solutions in U.S. cities

CHARLESTON, W.Va.: Bigger and bigger pension costs were draining the city’s general fund until a new law helped the city to set aside more assets for future benefits. The city also created a new plan providing less generous benefits for new police and fire employees.

CHICAGO: The city’s four pension funds were 36 percent funded as of Dec. 31, 2012, and had an unfunded liability of $19.5 billion. The city estimates that without changes, its required contribution to the funds will grow from $479.5 million in 2013 to $1.087 billion in 2015 and to $1.26 billion by 2020. Mayor Rahm Emanuel wants state lawmakers to suspend cost-of-living increases, increase employee pension contributions and give employees the option of a 401(k)-style plan.

NEW YORK: Changes to the pension system mean new workers will contribute a greater amount toward their own pension, and many workers will no longer be able to use overtime hours in the calculations of pension amounts.

OMAHA, Neb.: The city has nearly $800 million in unfunded pension liabilities, mostly because of shortfalls in the police and fire fund. New contracts will require increased pension contributions from police and firefighters and promise fewer benefits to new hires. The city hopes to fully fund its pension system by 2055.

PHILADELPHIA: The city’s unfunded pension liability was $5 billion as of March — and the amount it must set aside each year has doubled in the last decade. The city has proposed creating a new hybrid plan that combines a pension with a new 401(k)-type plan for new non-uniformed employees.

PORTLAND: A big chunk of Portland’s pension system is supported by a dedicated property tax. This unusual arrangement ensures that the retirement system doesn’t strain the city’s day-to-day revenues.

PROVIDENCE, R.I.: With the city on the brink of bankruptcy, the mayor negotiated concessions with unions and retirees to reduce its unfunded liability of more than $900 million by nearly $180 million.

–Associated Press

Detroit’s bankruptcy is casting a shadow over a long list of cities across the U.S. and giving mayors new urgency in the search for solutions to the greatest challenge to face America’s cities in a generation.

While no other city is expected to join Detroit in bankruptcy court anytime soon, similar problems brought on by waning industries, crushing debt and surging pension costs plague city halls from Providence, R.I., to California, and in response mayors are proposing big changes to what was long the biggest perk of a government job: a good and reliable pension.

“It’s the lesson of kicking the can down the road. You can put these things off. But at some point the bill comes due,” Baltimore Mayor Stephanie Rawlings-Blake said in an interview. “People ask me sometimes what keeps me up at night. The prospect of being one of those cities is what keeps me up at night.”

The total unfunded pension liability for all U.S. cities and counties is a whopping $574 billion, according to a 2010 study by economists at Northwestern University. That’s a formidable burden to cities already struggling with revenue declines, debt and the ongoing cost of providing services.

Years of financial neglect left Detroit’s finances in ruin, prompting its emergency manager to propose sweeping changes to the way the city doles out benefits by eliminating payment increases and creating a new 401(k)-style retirement system.

Rawlings-Blake has also proposed giving new employees a defined contribution plan, one that combines set contributions from workers and their employer, similar to the 401(k) accounts familiar to private-sector workers.

The change would be just one part of an ambitious 10-year-financial plan that involves lower property taxes, a smaller city workforce and the goal of attracting 10,000 new families to Maryland’s largest city.

New York Mayor Michael Bloomberg said the lesson from Detroit — burdened by $18 billion in debt, declining revenue and huge deficits — is that cities will ultimately pay a steep price for ignoring long-term challenges including diversification of industry, adequate funding of pension systems, population decline and debt.

Bloomberg pointed out that New York itself almost went bankrupt in 1975 — a tumultuous time when many cities were struggling to respond to urban decay, poverty, unemployment and the rise of suburbs.

“We would be foolish to ignore the factors that drove Detroit to bankruptcy,” Bloomberg said in July, shortly after the Motor City took its landmark step. “I believe that the Detroit experience holds lessons for every American city.”

More and more cities are proposing replacing traditional pensions for new employees with a defined contribution plan or a hybrid that combines a defined contribution plan with a smaller traditional pension. It’s been proposed in Philadelphia, and it’s already the law in Rhode Island, where the state pension system covers teachers and many local workers.