A farewell speech by Michael Bloomberg in New York, a new report on the future of Los Angeles and concerns expressed by Chicago's mayor all underscore the need to address the looming financial crisis that affects the country's three largest urban centers.
This crisis arises largely from the need to finance public employee retirement systems. Similar issues provide fiscal challenges other state and local governments.
Without specifically mentioning the bankruptcy filing of Detroit, leaders in the three cities recently called attention to the threats of pension costs to the economic vitality of their cities.
The problem is that the leaders, while pointed in the right direction, failed to come up with specific reforms and push for their enactment. Pension liabilities have continued to mount as talk hasn't been followed by solid reform.
Real leadership is needed to arouse public support for changes to public employee retirement systems to ease the potentially staggering burdens on future generations.
In New York, Mr. Bloomberg, nearing the end of his term as mayor, devoted a sort of farewell address on Dec. 18 to pension funding. “(T)here is one barrier to growth that has been particularly difficult to scale — and it is especially dangerous to ignore” — the cost of pension benefits, Mr. Bloomberg said, according to a transcript of his speech.
“And right now, our country appears to be in the early stages of a growing fiscal crisis that — if nothing is done — will (exact) a terrible toll on the next generation. Here in New York City, over the past 12 years our pension costs have gone from $1.5 billion to $8.2 billion. That's almost a 500% increase — when inflation totaled only 35% ...”
“Since 2010, 38 local governments have filed for bankruptcy, largely because of out-of-control pension costs. And more are now flirting with it. But even if struggling cities escape bankruptcy, the funds that must be diverted to cover skyrocketing pension bills are funds that cannot be invested in the future, which can set off a downward (economic) spiral...
“The costs of today's benefits cannot be sustained for another generation — not without inflicting real harm on our citizens, on our children and our grandchildren ....
“The private market has basically stopped offering defined benefit pensions — and yet in New York City, labor leaders have opposed any effort to give their members even the choice of a defined contribution plan.
“Employees who work for the City University of New York have that choice — and incidentally three-quarters of them choose the defined contribution plan because it is more flexible and portable. Why shouldn't New York City employees have the same choice?”
“It's the kind of questions that more and more mayors and governors — in both political parties — are asking across the country,” Mr. Bloomberg said.
Mr. Bloomberg said comprehensive benefit reform “is essential to our long-term future.”
On Jan. 8 the Los Angeles City Council released a report it commissioned: “A Time for Truth,” that discussed fiscal stability and job growth, including the threat from escalating pension financing.
“The cost of benefits ... have been rising rapidly and cannot be sustained at current revenue levels,” the report said. “Pension costs accounted for 3% of the city's budget a decade ago, and 18% (in 2013). The cost of covering further increases will continue to cut into the city's ability to supply services” and harm the local economy.
The report casts doubt on the city's pension funds' ability to invest their way out of the problem, and it questioned the city's lack of planning to address such rising costs. City public employee “headcount is down 12% since 2004, yet spending on pensions is up 250%,” the report said.
In Chicago, Mayor Rahm Emanuel said in a statement Dec. 5: “Chicago and all of the other local governments across our state ... are standing on the brink of a fiscal cliff because of our pension liabilities. Without providing the same relief to local governments, we know that taxpayers, employees, and the future of our state and local economies will remain at risk.”
Chicago under state law must raise pension contributions by $590 million in 2015, to $1.4 billion, almost 30% of the city's operating budget after mandatory interest payments.
A 35% increase in property taxes or a cut in the city's budget would be needed to meet required pension contributions for all local governments in the Chicago area, according to Fitch Ratings.
Cities must stop kicking the can down the road. Like Detroit, reform likely will face state constitutional or other legal challenges from participants that might take years to decide in the courts.
Until reform can be started, the cities should present a more accurate picture of pension costs by, for example, adopting more realistic discount rates for valuing liabilities to provide the public with better information and arouse support for change. The current rates now significantly undervalue those pension obligations.
City leaders should speak more frequently about these costs and the effect they will have on taxpayers, economic growth, and the level and quality of services.
In addition, cities should, to the best of their ability, increase contributions in the short term to keep pension liabilities from growing worse. So far, politicians in these cities have come up short in their ability to lead change. n