According to the Pew Center on the States this week, in 2009, pension liabilities of 61 major cities in the U.S. were $385 billion, of which $286 billion was funded. Additionally, these cities had retiree health care liabilities of $126 billion, of which only $8 billion was funded.
In total dollars, the 61 cities had promised three times more in pension benefits than in retiree health benefits. Yet more than a third of the cities faced bigger unpaid bills for retiree health care than for pensions.
As the report, A Widening Gap in Cities: Shortfalls in Funding for Pensions and Retiree Health Care, notes,
Pension costs can be a bigger weight on cities’ budgets than on states’ budgets. According to U.S. Census Bureau data, local governments in general spend more on employee compensation, and their pension contributions equal 9 percent of the tax revenue they collect, compared with nearly 5 percent for states.
The report looks at the most populous city in each state, plus any other city with more than 500,000 people. (45 percent of all city employees nationally are in these 61 cities.)
Seattle is the only Washington city included. Its pension obligations in 2009 were 81 percent funded (one of 24 cities above 80 percent). It made 107 percent of its annual recommended contribution (ARC) of $73 million. By contrast, Portland made only 62 percent of its ARC, and its pension obligations were only 50 percent funded. Pew has 2010 data for 40 of the cities, including Seattle. In 2010, it made 61 percent of its ARC, and its pension liabilities were 83 percent funded.
Overall, this study found a bigger gap in pension funding for city-run plans than for plans managed statewide or administered by the state for city and other public employees. Across the 61 cities, plans managed by cities for their own employees had on average 66 percent of the money needed in the long run, compared with an average of 79 percent for state-administered and statewide plans that covered city workers and others.
According to a recent report from the Washington State Institute for Public Policy, Retiree Benefits in Public Pension Systems, Seattle is one of four Washington cities that have their own retirement plans. Other cities’ employees participate in state-run plans. (Seattle’s plan is defined benefit.)
For retiree health care (part of what is termed other post-employment benefits, or OPEB), Pew reports that in 2009, Seattle made 61 percent of its ARC, and 0 percent of its obligations were funded. Portland made 30 percent of its ARC, and 4 percent of obligations were funded. Thirty-three cities have funded 0 percent of these obligations; they are funding retiree health care pay-as-you-go. According to the State Budget Crisis Task Force,
Most governments fund these benefits on a pay-as-you-go basis rather than contributing to a funded plan. They compute an ARC and report it in their financial statements but generally ignore it for budget purposes, simply paying actual benefits for current retirees.
As Pew notes, some cities made it through the recession better than others:
How cities fared before, during, and after the downturn has depended in large part on three factors: (1) fiscal discipline in making their annual payments; (2) the accuracy of assumptions used in their pension plans; and (3) decisions about workers’ benefits.
Given the funding problems, many cities are reforming their pension systems, and, per Pew,
Reforms are not just the province of underfunded systems. Some of the best-funded cities have sought relief after rising annual pension costs began taking up greater chunks of their budgets following the recession.
Washington Research Council 