How Cities Around the Country Address Rising Pension Liabilities

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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 2018 and shares their sentiments around the fiscal responsibility of their cities and the retirement needs of their workforces.

Amid decelerating property, sales and income tax revenue growth, mayors across the nation are worried about funding pensions.

As a result, city officials have only budgeted for 0.37 percent growth for FY 2018, while expenditures have been growing around two percent over the past few years. In 34 out of 160 (21 percent) state of the city speeches we collected last year, mayors talked about pensions, and of those, a majority (61.76 percent) cited rising pension liabilities as a pressing issue.

This is an especially big problem for Pasadena, California.

“I have tried to provide our residents with a background on how we pay for city services and to alert everyone that the day was fast approaching when we could not rely on our current sources of revenue to adequately pay our bills. Unhappily, in spite of all the positive things happening in our city, that day has arrived,” said Mayor Terry Tornek, who devoted almost his entire speech to the city’s budgetary dilemmas and rising pension costs.

In Pasadena, expenditures will begin to exceed revenues by $3.5 million in FY 2019, largely due to a whopping increase in the city’s contribution to CalPERS, the state’s public employee retirement system.

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Source: The city of Pasadena

Here are just a few other cities that are struggling, particularly with large amounts of unfunded pension liabilities:

  • Fort Worth, Texas, is looking at $1.6 billion in liabilities. Unless action is taken, its pension fund will run out of money by 2050;
  • Lansing, Michigan, is at $680 million; and
  • Peoria, Illinois, is at $300 million.

What this means is that cities will need to cut services and personnel to relieve some of the fiscal burden of rising pension costs.

Of course, many cities are still recovering from the Great Recession and have been cutting services consecutively for the past 10 years.

“For city employees, it meant sacrifice – concession after concession, furlough after furlough,” said Former Mayor Greg Stanton of Phoenix, Arizona.

Most significantly, in Pasadena, California, the city eliminated 123 positions including in the police force, lowered its expenditures by $19.2 million and reduced local transit service. Although the city has tried to cut services that have minimal impact on its residents, “we’ve reached the point that any further reductions will have noticeable impacts,” said Mayor Tornek. “It is expected that as part of next year’s budget, every department — including Police, Fire, Human Services and Recreation — will have to reduce services. Even more worrisome is that given current projections, the city will be forced to make even more drastic cuts over the next few years which will directly impact the services our community relies on.”

However, there are cities that have made efforts to outsource certain services instead of cutting them. For example, the city of Fitchburg, Massachusetts, contracted out its animal control services. By privatizing the service, the city effectively reduced its expenses, which were originally budgeted at around $106,000, and lessened the city’s dependence on other post-employment benefits (of which a large contributor is retiree healthcare) since the personnel working at the animal control services are no longer considered city employees.

In addition to cutting or outsourcing services, cities have also had to reduce or, more commonly, freeze wages. For example, the city of Ocean City, New Jersey, negotiated with its unions to allow salaries to remain flat as the state-mandated city contribution rose.

But some mayors have had to cut salaries, as Mayor Shawn Morse of Cohoes, New York, mentioned in his speech: “I was criticized when I asked Chief Heslin, Assistant Chief Ross, Commissioner Radliff to retire, and then come back to work for a reduced salary. It was a benefit that helped all parties. Today, we have three great leaders still leading their departments and the city saved over $150,000 in wages and $75,000 in pension costs for active employees.”

This was a tough decision to make, but it paid off when Moody’s Investment Services gave Cohoes a solid credit rating. In the end, the city maintained a strong financial position and an affordable debt burden with a moderate pension liability, a direct reflection of the personnel changes that the mayor made over the past two years.

Although these measures might appear unfavorable to constituents and city employees at first glance, cities have been working hard to minimize the negative effects of these measures, by either cutting services where they are least noticeable or negotiating with unions and city employees. When faced with budgetary dilemmas, city officials have to make tough decisions regarding rising pension costs, a shrinking tax base and decelerating revenue growth.

But in the end, efforts to maintain pension costs should pay off, either in improved credit ratings (as we have seen recently with Imperial Beach, California) and/or improved fiscal health, allow cities to better improve services and better serve their residents.

Want to be featured in this year’s State of the Cities (SOTC) report? Send a PDF of your 2019 state of the city speech to rkim@nlc.org by April 1 to qualify. Three lucky city leaders will also receive an all-expenses paid trip to D.C. to participate in our SOTC panel this spring.
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About the Authors: Anita Yadavalli is the Program Director of City Fiscal Policy at NLC. Anita leads NLC’s Public Sector Retirement initiative, with a focus on research and education for city leaders on retiree healthcare benefits, as well as research and programming on other city fiscal policy issues.
201903193077601260516827528.jpg Mia Huang is the research intern for NLC’s Center for City Solutions. She supports the Center’s research priorities, with a focus on pension and healthcare research as well as the annual State of the Cities report. Huang is currently pursuing a Bachelor of Science degree in Economics at Duke University.