State of the Cities: The Case of Pensions

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This is an NLC staff post by Anita Yadavalli and Yang You.

In advance of our annual State of the Cities report, which will be released later this year, this blog series captures speeches given by mayors in 2017. This blog is part one of a four-part series focused on mayoral dialogues and sentiments around the fiscal responsibility of the city and the retirement needs of the workforce.

The state of retirement funding has become an obvious fiscal concern for city governments, especially since the Great Recession. In fact, a recent National League of Cities survey revealed the cost of employee/retiree pensions ranks third (following infrastructure needs and public safety needs) among the most negative factors impacting city budgets. Perhaps more telling is the approximately 81 percent that indicated pension costs increased in the last year.

graph.pngAnd some cities are struggling to fund those pension costs. As a matter of fact, from 2001 to 2015, aggregate public sector pension funding declined significantly from 100% to 73%. It is no wonder then, that in 2017, 22 of the 120 mayors that we studied focused their State of the City addresses on pension funding. From Newton, Massachusetts, to San Diego, California, city leaders have underscored the importance of taking necessary steps toward a more fiscally sustainable future.

We divided the speeches into four categories defined by population size (less than 50,000; 50-99,999; 100-299,999; and 300,000 or more). Among the 22 speeches that addressed pension-related issues, cities in all 4 population groups have a similar level of coverage, suggesting their import among mayors of all-sized cities across the nation. It is worth noting that while many mayors touched on those issues briefly in their speeches, a few mayors laid out detailed road maps, aiming to improve the long-term fiscal health of their city.

Of our sample, city leaders in California (32%), Illinois (14%) and Massachusetts (9%) together account for more than half of all the speeches that discussed pensions. While our sample is skewed by the speeches that we could actually find, these statistics are telling and are therefore exemplified here. Speeches given by mayors from these three states shed light on the challenges faced by cities in dealing with the pension funding gap, rising long-term pension costs, additional funding sources and the overall growing tension between the state and the municipalities.

Mayors generally provided a pessimistic outlook for the future due to the significant gap between current contribution levels and the pension liability. Simply stating facts, Tom Tait, Mayor of Anaheim, California, said, “$580 million. This is the amount of money we don’t have that we need to fund our pension liability.” And in Syracuse, pension bills grew by 76% within a decade.

Some mayors also worry the pension liability has already surpassed the city’s assets. Even worse, the pension cost is expanding at a rate that seems unsustainable under projected city revenues. Some mayors have also voiced their concerns over the underfunding of pensions and increasing long-term pension costs due to lower-than-expected investment returns (see also “How to Measure Pension Fiscal Health”).

“We have paid more than the actuary required…44% of the tax levy for the City goes for Police and Fire Pension…those numbers are a threat to everything we love about our city,” said Elizabeth Tisdahl, Mayor of Evanston, Illinois.

To fulfill the expected pension level, mayors need to find new revenue sources. But the current political environment does not necessarily encourage an increase in the property tax and sales tax, which are seen by many cities, particular in Illinois and California, as the major sources of funding. In some small cities in Illinois, pension obligations have already consumed the majority of property taxes (Evanston and Peoria, Illinois), where the cities are no longer able to develop infrastructure, expand city services, or add K-12 education expenses.

“In a few years our pension obligations will be totally consumed by our property taxes,” said Jim Ardis, Mayor of Peoria. As a result, funding must come from other capital investment or infrastructure redevelopment projects, which could further affect the city development and outlook.

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Additionally, increasing tensions between state and local governments have added to the financial burden for many cities, particularly in Illinois, New York and California. For example, mayors, particularly those representing small and mid-sized cities, tend to worry the most about how the failure of the state pension system has pushed the cities to increase contributions from their own general fund. For California in particular, many cities have shown concern over the surprisingly low return on investments by CalPERS, the state’s public employee retirement system.

“Like most California cities, our retirement is administered by CalPERS in Sacramento. Last month, CalPERS revised downward its projections of how well their investments are paying off. As of now we don’t know how much it will cost and what will be the impact on the City,” said Mike Murphey, Mayor of Merced, California. And in Massachusetts, the state legislature passed an initiative mandating municipalities to fully fund their pensions by 2036. These types of state mandates place additional burden on local governments.

Today, many cities have set goals to fully fund the pension system and eliminate the unfunded liability in the near future. However, our study revealed mayors’ concerns over the significant gap between their current pension contributions and their obligations. In addition, some city leaders are continuing to be negatively impacted by growing tensions with their state leaders.

Continued growth in pension liabilities for many cities poses not only immediate but also long-term threats to cities’ fiscal conditions, and cities must find additional sources to fund pension costs.

anita-photo.pngAbout the Authors: Anita Yadavalli is program director for city fiscal policy in NLC’s Center for City Solutions.

 

 

headshot.jpgYang You is the research intern for NLC’s Center for City Solutions. He supports the Center’s research priorities, with an emphasis on the annual State of the Cities and City Fiscal Conditions reports and Mayors Institute on Preemption. Yang holds a Bachelor of Arts in Political Science and a Bachelor of Science in Supply Chain and Operations Management from the University of Minnesota.