Tags: philadelphia | chicago | boston | pensions

Philadelphia, Chicago and Boston Are Study’s Worst-Off Pensions

Tuesday, 12 Oct 2010 07:36 AM


Philadelphia will run out of money by 2015 to pay pension obligations with existing assets, and Chicago and Boston by 2019, a study by economists at Northwestern University and the University of Rochester forecasts.

The report, “The Crisis in Local Government Pensions in the United States,” warns that mounting liabilities threaten “the ability of state and local governments to operate.”

The study examines 77 of the largest municipal defined pension plans, covering 2 million public employees and retirees, roughly two-thirds of the nation’s total. The estimated liability of all municipal retirement funds is $574 billion, according to economists Joshua Rauh of the Kellogg School of Management at Northwestern University and Robert Novy-Marx of the University of Rochester.

Chicago residents face the highest individual burden for pension liabilities from seven municipal retirement plans, amounting to nearly $42,000 per household. New York City residents face the second-highest per-household burden, just under $39,000.

These amounts are in addition to the estimated $3 trillion in unfunded liabilities that taxpayers will shoulder from state retirement systems, which Rauh and Novy-Marx examined in a 2009 report.

Urban Concentration

“The fact that there is such a large burden of public employee pensions concentrated in urban metropolitan areas threatens the long-run economic viability of these cities, as residents can potentially move elsewhere to escape the situation,” wrote Rauh and Novy-Marx.

The combined per-household liability for state and municipal pension underfunding for Chicago homeowners would total $71,000, or about $76 billion total, the report said.

The average household obligation for unfunded state and local pension debt is $41,165, the study said.

Philadelphia will be the first to run out of money from existing assets. Rauh said the “day of reckoning” for that city and others may arrive sooner if pension funds do not earn the anticipated 8 percent return on equity that most funds hope for.

Mayor Michael Nutter said last month that he plans to end the city’s defined benefit retirement system, which promises a set level of pension payments to retiring employees based on their pay and length of time on the job.

“We’re the last bastion of defined-benefit plans, which are unsustainable,” Nutter said of government systems at the Bloomberg Cities & Debt Briefing in New York. “Pensions are the fastest growing part of our budget.”

Hiding the Bill

Government pension accounting requirements effectively obscure the true costs of pension promises, Rauh said. The combination of underfunding and poor investment returns presents a growing financial threat, he said.

The study calculates that by 2015, Philadelphia’s expected pension-benefit payments will compose 19 percent of the city’s anticipated revenue. In Boston, benefits will consume 27 percent of 2019 revenues. And in Chicago, promises will gobble up 53 percent in 2019.

If all other spending were shut down, the report said, Chicago would have to dedicate about eight years of tax revenue just to cover pension promises.

Six large cities are listed as most vulnerable -- Philadelphia; Boston; Chicago; Cincinnati; Jacksonville, Florida; and St. Paul, Minnesota -- because they are projected to run out of money from existing assets no later than 2020. Another 36 cities and counties are projected to be in similar trouble by 2030.

Going to Washington

As the financial problems deepen, political pressure will build for a government bailout, first with cities going to states for help, followed by states going to Washington, Rauh predicted.

“Without fundamental reform of the compensation systems that these state and local governments are using, we are headed to a debt crisis of some kind for some subset of U.S. state and local governments, on a five to 10 year horizon,” Rauh, an associate professor of finance at Kellogg, said in an interview.

States will “cease to be able to function” because the accumulation of debt will prevent some of them from borrowing money, Rauh said.

© Copyright 2015 Bloomberg News. All rights reserved.

Around the Web
Join the Newsmax Community
Please review Community Guidelines before posting a comment.
>> Register to share your comments with the community.
>> Login if you are already a member.
blog comments powered by Disqus
Zip Code:
Privacy: We never share your email.
Hot Topics
Follow Newsmax
Like us
on Facebook
Follow us
on Twitter
Add us
on Google Plus
Around the Web
Top Stories
You May Also Like

Allen West: Joint Chiefs Shouldn't Focus on Essay Contest

Monday, 26 Jan 2015 22:16 PM

Joint Chiefs of Staff Chairman Gen. Martin Dempsey is taking heat from liberals and conservatives after he announced an  . . .

Snowstorm Threatens to Paralyze Northeast for Days

Monday, 26 Jan 2015 18:12 PM

Tens of millions of people along the Philadelphia-to-Boston corridor rushed to get home and settle in Monday as a fearso . . .

Report: Feds Stockpiling License Plates, Driving Habits in Database

Monday, 26 Jan 2015 20:58 PM

A new report claims the government is stockpiling a vast national database of Americans' license plates and driving habi . . .

Most Commented

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

America's News Page
©  Newsmax Media, Inc.
All Rights Reserved