Cities from New York to San Jose, Calif., facing almost $400 billion in unfunded pension liabilities, will be watching what San Diego Mayor Jerry Sanders calls his “radical idea” to cut costs.
After voters on Nov. 2 rejected a half-cent sales tax increase to balance the budget, Mr. Sanders is pushing to eliminate pension plans for new city employees, offering 401(k)-like savings accounts instead.
Mr. Sanders' plan exemplifies cities' struggle to escape the pincers of falling tax revenue and rising retirement costs that consume as much as a fifth of their budgets. The longest recession since the Great Depression cut receipts in 2010 the most in 25 years, the National League of Cities said last month.
“We're all going to have to get realistic,” Mr. Sanders said in a telephone interview. “The private sector went through this. Government will have to relook at how we do stuff as well.”
Stock market losses left 50 of the largest municipal pension plans with an unfunded gap of $382 billion as of June 2009, according to Joshua Rauh, a professor at Northwestern University's Kellogg School of Management in Evanston, Ill. That's the equivalent of $14,000 per household in those cities, or more than three years of revenue.
“It's a double whammy,” Mr. Rauh said in a telephone interview. “Exactly at the time when tax revenues are down, so are their pension portfolios.”