Cities Squeezed by Pension and Retiree Health Care Shortfalls

QUICK SUMMARY

This brief finds that 30 cities at the center of the nation’s most populous metropolitan areas faced more than $192 billion in unpaid commitments for pensions and other retiree benefits, primarily health care, as of fiscal 2009 and are employing a variety of strategies to address these shortfalls. These findings echo an earlier Pew assessment of 61 cities’ retirement funding: A Widening Gap in Cities: Shortfalls in Funding for Pensions and Retiree Health Care

The 30 cities in this study had a long-term shortfall of $88 billion for pensions and $104 billion for retiree health care and other non-pension benefits. 

New York, the nation's largest city, accounted for more than half of the total retirement shortfall. But retirement underfunding looms as a long-term budget stress across a wider array of the cities when looked at on a per-household basis. New York, which is responsible for not just a large number of municipal employees but also multitudes of teachers, had unfunded pension liabilities of $14,302 per household. Pension shortfalls per household were next highest in Philadelphia at $12,170, Portland, OR, at $11,389, and Chicago at $11,110 and pose a significant challenge for policymakers and ultimately taxpayers.

For retiree health care, the most serious underfunding per household was in New York at $22,857, followed by Boston at $18,962, Detroit at $15,682, San Francisco at $13,487, and Baltimore at $10,208.

Overall, the 30 cities, which are the focus of Pew's American cities project, had 74 percent of the money needed to fully fund their pension plans over the long run but only 7.4 percent of what was necessary to cover their retiree health care liabilities as of fiscal 2009, the latest year with data available for all pension plans of all 30 cities. 

Unfunded pension and retiree health care obligations pose a significant concern for city budgets. Although these unpaid bills are not due immediately, they limit policymakers' ability to invest in other priorities because they place a claim on future revenue. Every dollar that goes to plug a hole in a city's retirement funds is a dollar that cannot be spent on education, public safety, libraries, and other services. The longer unfunded liabilities go unaddressed, the larger the bill facing future city budgets and taxpayers. To shore up retirement funds, local officials may have to cut services, reduce the workforce, or raise taxes. Cities also can pay a price through higher borrowing costs because credit rating agencies incorporate unfunded retirement costs into their analyses.

Localities have employed a variety of strategies to address their growing retirement liabilities, including increasing the retirement age or vesting periods and putting larger amounts of municipal revenue into pension funds. Some cities are pushing to cut cost-of-living increases to retirees or are asking current workers to contribute more money to their own retirement benefits. Most reforms, however, affect only new hires, which does nothing to reduce the sum of unpaid bills.