Cities chart course through pension morass

By DAVID KLEPPER

Asso­ci­ated Press

PROVIDENCE, R.I. (AP) — In Philadel­phia, pen­sion costs dou­bled in a sin­gle decade. Cities in Rhode Island dimmed street­lights, raised taxes and put off road repairs. Stock­ton, Calif., fell into bankruptcy.

Unpaid bills from decades of retire­ment promises made to pub­lic work­ers, com­bined with a lack­lus­ter econ­omy and steep Wall Street losses, have built up a finan­cial moun­tain that threat­ens to over­whelm bud­gets and oper­a­tions in cities and coun­ties across the country.

While it hasn’t got­ten the atten­tion of the “fis­cal cliff” in Wash­ing­ton, the pen­sion cri­sis at City Hall could have sim­i­lar effects as may­ors are forced to raise taxes, cut gov­ern­ment ser­vices or renege on retire­ment promises made to police offi­cers, fire­fight­ers, teach­ers and other pub­lic workers.

“It’s not about assign­ing blame, because look, these num­bers are star­ing us in the face,” said Allan Fung, the mayor of Cranston, R.I., where the pen­sion fund is only 16 per­cent funded and the city needs $270 mil­lion to meet its pen­sion oblig­a­tions. “It’s a dire sit­u­a­tion for us and for many cities and towns around the coun­try. It’s a recipe for dis­as­ter at the worst eco­nomic time possible.”

Col­lec­tively, Amer­i­can munic­i­pal­i­ties face nearly $600 bil­lion in unfunded pen­sion oblig­a­tions. The prob­lem arose in many cities because local lead­ers for decades failed to prop­erly fund retire­ment sys­tems. Longer-living retirees and ris­ing health care costs drove costs higher.

Then came the eco­nomic down­turn, in which invest­ment losses dec­i­mated even rel­a­tively well-off pen­sion funds. San Diego’s unfunded pen­sion lia­bil­ity surged from $1.3 bil­lion in 2008 to $2.11 bil­lion in 2009.

In Philadel­phia, the city’s annual pen­sion costs are now cal­cu­lated to be well over $500 mil­lion — up from $200 mil­lion a decade ago. The city’s total annual bud­get is $3.5 bil­lion and it faces a gap of $4.5 bil­lion between what is promised to work­ers and what is set aside to pay for those benefits.

Unions argue work­ers aren’t to blame for poor invest­ments or past fail­ures to fund pen­sion sys­tems. Anthony Mar­tin, a Chicago fire lieu­tenant and trustee of his pub­lic pen­sion fund, said he has seen records going back to 1877 show­ing the retire­ment sys­tem was under­funded even then.

“You have a dys­func­tion in gov­ern­ment that is hard to over­come,” Mar­tin said. “Year after year they kicked the can down the road.”

There’s some evi­dence that may be chang­ing, how­ever, as may­ors find they can no longer ignore mount­ing pen­sion bills. Prov­i­dence Mayor Angel Taveras suc­cess­fully nego­ti­ated con­ces­sions with unions and retirees to shave $178 mil­lion off the city’s future pen­sion oblig­a­tions. The city had faced $903 mil­lion in future pen­sion costs, which Taveras had said could force the city into bankruptcy.

“Through col­lab­o­ra­tion, we have pulled Rhode Island’s cap­i­tal city back from the brink of bank­ruptcy while spar­ing tax­pay­ers the unnec­es­sary expense of a long, costly legal chal­lenge that threat­ened our future,” he said after the police union voted to accept the agree­ment, which will sus­pend pen­sion increases and elim­i­nate the prac­tice of giv­ing some work­ers com­pounded 5 or 6 per­cent pen­sion increases annually.

The nego­ti­ated set­tle­ment is among the first of its kind in the coun­try, and could fore­shadow sim­i­lar deals in other cities.

States around the coun­try face even more expen­sive prob­lems in their own retire­ment sys­tems — $1.4 tril­lion at last esti­mate. But may­ors face a pen­sion puz­zle that can be even more chal­leng­ing. State retire­ment ben­e­fits are often set through statute, but local pen­sions are typ­i­cally nego­ti­ated through col­lec­tive bar­gain­ing, mak­ing them much harder to break unilaterally.

Rhode Island had one of the nation’s worst pen­sion prob­lems before law­mak­ers passed a sweep­ing over­haul in 2011 that sus­pended pen­sion increases, raised retire­ment ages and cre­ated a new ben­e­fit that merged tra­di­tional pen­sions with 401(k) plans. The moves — now being chal­lenged in court — will save an esti­mated $4 bil­lion in com­ing decades.

The changes affect teach­ers, state work­ers and munic­i­pal employ­ees and retirees who par­tic­i­pate in the state’s pen­sion sys­tem. Despite pleas from may­ors and Gov. Lin­coln Chafee, munic­i­pal pen­sion plans were left out of the over­haul. Top law­mak­ers said it was up to may­ors to nego­ti­ate pen­sion concessions.

In Illi­nois, state law sets retire­ment ben­e­fits for all pub­lic employ­ees, includ­ing city work­ers and Chicago Pub­lic Schools teach­ers. That means Chicago Mayor Rahm Emanuel must head to the Capi­tol in Spring­field to lobby for any changes. In May, he told law­mak­ers that if they didn’t pass reforms he would be forced to choose between let­ting the funds go bank­rupt or increas­ing prop­erty taxes by 150 percent.

“As long as I am mayor of Chicago, that is a bur­den I refuse to put on the backs of our tax­pay­ers,” Emanuel told mem­bers of the House pen­sion committee.

Bank­ruptcy is another option — though one offi­cials are loathe to consider.

The state-appointed receiver in charge of Cen­tral Falls, R.I., filed for bank­ruptcy on behalf of the city in 2011. He went on to slash pen­sions for retirees by up to 55 per­cent. The retirees had refused to agree to take vol­un­tary cuts, though the receiver warned that he was pre­pared to take uni­lat­eral action. He said the retirees’ choice was between a “hair­cut or a beheading.”

“They stuck it to us,” said Bruce Ogni, who retired as a cap­tain from the Cen­tral Falls Police Depart­ment. His $41,000 pen­sion was cut to $29,000. “We were told if we didn’t take the deal they might stop the pen­sions alto­gether. We took the hit for other people’s mistakes.”

Stock­ton, Calif., filed for bank­ruptcy pro­tec­tion in June, becom­ing the largest Amer­i­can city to take such a dras­tic step. Offi­cials cited the hous­ing col­lapse, a strug­gling local econ­omy and pen­sions. While pen­sions in Stock­ton won’t be impacted by the bank­ruptcy fil­ing, health ben­e­fits for employ­ees and retirees are on the table. The unfunded lia­bil­ity for those ben­e­fits stands at $417 million.

An August report by Moody’s Investors Ser­vice that pre­dicted more bank­rupt­cies and defaults in Cal­i­for­nia as cities and towns reel from the col­lapse of the hous­ing mar­ket, the down­turn and ris­ing pen­sion costs.

Res­i­dents in San Jose voted this sum­mer to cut the pen­sion ben­e­fits for city work­ers. San Diego res­i­dents approved sim­i­lar changes in June, vot­ing to change the way pen­sions are cal­cu­lated and place all new hires — except police offi­cers — into a 401(k)-style plan.

Jack Can­ning, a 62-year-old civil engi­neer for the city of San Diego, said pay cuts and freezes forced him to post­pone retire­ment for two years until he turns 67.

Still, he con­sid­ers him­self lucky. Newer employ­ees with infe­rior pen­sion ben­e­fits resent vet­er­ans like him.

“Peo­ple say stuff to me like, ‘Why are we hold­ing onto pen­sion ben­e­fits that you guys have and we don’t?’” he said.

Con­tribut­ing to this report were Asso­ci­ated Press writ­ers Sara Bur­nett in Chicago, Elliot Spa­gat in San Diego, Ben Nuck­ols in Wash­ing­ton, Christina Almeida in Atlanta, Marc Levy in Har­ris­burg, Amanda Lee Myers in Cincin­nati and Kevin McGill in New Orleans.

Posted by Becky Brooks on Jan 3 2013. You can follow any responses to this entry through the RSS Feed. Both comments and pings are currently closed.