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Pensions Threaten to Sink Cities

Pension problems at the state level have been grabbing headlines for some time, but many experts believe the real trouble is at the local level.

Long Beach, Calif., is home to one of the world’s busiest shipping ports. Yet its fiscal woes are as big as the giant freighters that dock there. Despite paring back its budget by $188 million over the course of several years, the Southern California city of 462,000 can’t seem to shake its rising pension costs. If nothing changes, Long Beach will eventually have to devote its entire budget to funding workers’ retirement.

Long Beach is just one of many cities facing serious budget problems because of ever-growing pension obligations. Central Falls, R.I., received national attention in July when city leaders asked current retirees to give up a portion of their retirement benefits to stave off possible bankruptcy. Pittsburgh is also on the brink of trouble: Its system was only 30 percent funded until its pension board reported in September that future revenues would raise the amount to 62 percent. Anything less than 50 percent would have triggered a state takeover, which city officials said would have led to significant financial consequences.

While pension problems at the state level have been grabbing headlines for some time, many experts believe the real trouble will occur at the local level, where worker compensation and benefits account for as much as 80 percent of a city’s budget. To cover ballooning pension costs, some cities have resorted to tax increases, worker layoffs and service cuts. But critics call this managing a city by decline and say it doesn’t address the real problem. Other cities, however, have begun to tackle the pension problem head on, making changes ranging from modest to radical that will put them on sound fiscal footing in the years ahead.

Long Beach persuaded its police union to agree to increase contributions from 2 percent to 9 percent. Now, it just needs to convince all the other city workers to sign on. Atlanta has gone even further. With a $1.5 billion unfunded pension liability, the city was on course to pay 20 cents of every dollar in revenue toward its obligations. As a result, the City Council passed major reforms this year that include increasing what current and future workers must pay in to the system, raising the retirement age and placing new employees into a hybrid plan that combines traditional defined benefits with a 401(k)-style defined-contribution plan. The new plan saves $25 million in the first year and enables the city to pay off its huge pension liability down the road.

Initially negotiations were tense. But after several months, Atlanta Mayor Kasim Reed (a 2011 Public Official of the Year) and the City Council finally passed a compromise unanimously. The plan has already been cited as a model for other cities struggling with soaring pension costs. Given the continuing tight fiscal situation, a reform model based on compromise is better than no model at all.

Update and correction, Dec. 6: Tom Modica, director of government affairs and strategic initiatives for the city of Long Beach, Calif., has sent an update to the city’s pension situation. Since the article was written, city officials have negotiated an agreement with the firefighters and are discussing a new agreement with a final group. Meanwhile, the city has pension agreements with five other bargaining units that make up the rest of the city’s workers represented by unions.

Modica also corrected information regarding the rising costs of its pensions. While significant, pension costs will consume 14 percent of the general fund in fiscal 2012, and are not expected to consume the entire city budget as was reported earlier in this article.--Tod Newcombe

Caroline Cournoyer is GOVERNING's senior web editor.
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