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

Tuesday, 12 Oct 2010 07:36 AM

 

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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.


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