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Gauging the Burden of Public Pensions on Cities

Listed author(s):
  • Alicia H. Munnell
  • Jean-Pierre Aubry
  • Josh Hurwitz
  • Mark Cafarelli

Stories in the popular press suggest – particularly in the wake of the bankruptcy of Detroit – that pensions are the major expense of American cities and will lead to their widespread collapse.1 Thus, it is important to know the burden of pensions on cities. This burden can be measured in two ways. The first is the direct cost of pensions to city governments. These costs include contributions to locally-administered plans, contributions to state non-teacher plans, and contributions to state teacher plans on behalf of dependent school districts. The direct cost measures the pressure on the city’s finances. But there is also a broader question: how much do residents of a city pay for pensions? Here one would add to the city’s direct costs the contributions made by independent school districts that serve city residents and contributions that city residents make to county plans. This second concept – which is more comprehensive, avoids distortions created by local government arrangements, and provides a measure of residents’ incentive to move – is the focus of this brief. The question is whether pension costs – measured comprehensively – account for 5 percent or 50 percent of total local revenue raised from city taxpayers. (The Appendix presents both measures of the pension burden.) The discussion proceeds as follows. The first section highlights the importance of looking beyond the cost of locally-administered plans and describes the process of collecting and allocating the amounts paid for pensions by school districts within the city and by counties in which the cities are located. The second section describes our sample of 173 cities and illustrates how costs and revenues from the various units of local government are allocated to city taxpayers. The third section reports that, for the full sample, overall pension costs borne by city residents amount to 7.9 percent of revenue. The discrepancy between the 7.9 percent and the average reported in the U.S. Census of 5.6 percent is primarily because our study uses the full Annual Required Contribution (ARC), while the Census reports the amount that the local governments actually paid. In terms of individual cities, taxpayer costs average 2.7 percent of revenue for the least expensive fifth of cities and 12.3 percent for the top fifth. Among major cities, Chicago, New York, and Philadelphia have very high pension costs. Detroit was #61 primarily because it issued Pension Obligation Bonds in 2005, which increased its overall borrowing costs but reduced its reported pension expense. The final section concludes that pension costs are closer to 5 percent of revenue than to 50 percent for cities, even in the wake of two financial crises and the Great Recession. However, in those cases where pensions are both expensive and underfunded, such as Chicago, they exacerbate fiscal problems.

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Paper provided by Center for Retirement Research in its series Issues in Brief with number ibslp35.

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Length: 14 pages
Date of creation: Nov 2013
Handle: RePEc:crr:issbrf:ibslp35
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