Cities face grave pension deficits, report says

September 26, 2013

Most of the 50 local governments with the largest pension debt have worker retirement liabilities that are greater than their annual tax revenue, according to a new report from the credit-rating firm Moody’s.

The pension burden posed by current and future municipal retirees is significant and apparently troublesome for many local governments, the report said. Others, including Washington, D.C., have liabilities that appear manageable.

The report was issued the same day that Detroit’s emergency manager, Kevyn Orr, indicated that he wanted to freeze the city’s pension plans and move workers into 401(k)-type accounts.

Under the freeze, retirees would still collect pensions but current employees could not accrue further benefits, and some cost-of-living adjustments would end, according to news reports. The freeze must be approved by Michigan’s treasurer and could come under legal challenge because of prohibitions in that state’s constitution against trimming pension payments.

The move in Detroit, which filed for bankruptcy in July, came after an auditor’s report found that the city’s pension system made questionable bonus payments to retirees.

The Moody’s report found that other than Detroit, the most severely underfunded local government entities were in the Chicago area, which is also in the state that has the nation’s most severely underfunded pension system.

The city of Chicago, whose credit rating was downgraded in recent months, has pension liabilities that are 678 percent of its annual revenue, Moody’s said. Cook County, which includes Chicago, has the second-worst pension liability burden, at 382 percent of revenue. Meanwhile, the metropolitan water system had the sixth-worst ratio at 323 percent.

Chicago Mayor Rahm Emanuel (D) has warned that the city’s required pension contributions will nearly triple, to $1.2 billion, between 2014 and 2015 — about one out of every five dollars spent to run the city. He has called for the state to restructure the pension system, saying essential city services would otherwise suffer.

But any deep cuts would also hurt retirees and future retirees. Many of the city’s nearly 72,000 retirees are not eligible for Social Security and have pensions that average a little more than $41,000 a year, according to the city.

The Moody’s report said four other local governments carried overall pension liabilities that were at least four times their annual revenue: Denver County School District; Los Angeles; Jacksonville, Fla.; and Houston. Overall, 30 of the top 50 local governments examined in the report have pension liabilities that exceed the revenue collected in a year.

The degree of pension burden varies widely across the government entities included in the Moody’s report. Some had very low pension burdens. Among them were Washington, where the pension liability is only 11 percent of annual revenue, and Wake County, N.C. where pension liabilities add up to 15 percent of annual revenue.

The District’s old pensions were taken over by the federal government as a result of the city’s budget crisis in the mid-1990s. Meanwhile, the city has not run into any financial problems with its newer pensions.

Since pension liabilities are estimates projected over decades, the financial pressure they place on local budgets varies widely. In prosperous places with growing tax bases, the pension costs are easily managed. Strong investment gains also can relieve the fiscal pressure.

In other cities, the liabilities pose more of a burden, which Moody’s says is a reality confronting a growing number of municipalities.

“Keeping up with pension contributions will be a pervasive negative pressure,” Moody’s analyst Tom Aaron said in a statement.

Moody’s report comes as investors are paying closer attention to the debt burden of municipalities since Detroit became the largest city in U.S. history to file for bankruptcy. That city is more than $18 billion in debt, and about half of that is for pension and health-care obligations owed to workers and retirees.

Detroit was in a uniquely precarious place because the city’s population and tax base have plunged for decades, a situation that has grown more extreme over the past decade.

Michael A. Fletcher is a national economics correspondent, writing about unemployment, state and municipal debt, the evolving job market and the auto industry.
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