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Cities short on pension, health care funds

Report: Washington, Baltimore faring better on liabilities than counterparts

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The Great Recession has taken a heavy toll on public pension and retiree health care funds in dozens of the nation's biggest cities, according to a study released Wednesday, as top cities around the country struggled to keep up with their liabilities amid plunging revenues.

But the survey by the Pew Charitable Trusts based on fiscal 2009 data found that city workers and retirees in Washington and Baltimore emerged in better shape than those in many other big cities around the country.

Local governments emerged from the recent sharp economic downturn more than $217 billion short of what they promised their workers in retirement benefits, such as pensions and health care, in 61 of the largest cities around the country.

"Things have likely gotten worse since 2009," said David Draine, senior researcher at the Pew Center on the States, which helped compile the data.

With funding equal to 104 percent of pension liabilities, the District of Columbia boasted the second best financial foundation of the 61 cities studies, trailing only Milwaukee at 113 percent. Baltimore had covered 86 percent of its pension obligations, according to the survey, while Charleston, W.Va. was last at 24 percent.

The study's authors said local management was a key factor in how municipalities did during the sharp economic downturn.

"Whether a city was fiscally disciplined made a big difference in how it fared," the report said. "Cities with pension plans that kept up their payments — consistently making the 'annual recommended contribution' calculated by their actuaries — weathered the financial downturn better than their counterparts."

The study looked at retirement savings in the largest city from each state, as well as all other cities with more than 500,000 people, from 2007 to 2009, which is the most recent year for which complete data were available.

Collectively, these cities found themselves $99 billion behind on pensions, and $118 billion short on retiree health care and other promised benefits. And the numbers are likely to get worse. Among the 40 cities that have reported numbers for fiscal 2010, the pension gap grew by an average of 15 percent.

"Cities have largely failed to fund," Mr. Draine said. "Rather than having all those losses go on the books at once, they spread it out over time." That means these cities can expect to see funding gaps continue to grow over the next few years.

"In 2009, we're only seeing part of the impact of the recession," the analyst said.

So far, few cities have defaulted on retirement payments, despite the bleak outlook, Mr. Draine said. "By and large, retirees are still getting their retirement checks that they were promised," he said.

He pointed to Central Falls, R.I., and Prichard, Ala. as two of the only cities that have declared bankruptcy due to pension demands they couldn't meet.

But Washington and Baltimore were among a small minority of big cities that outperformed their peers during this time.

In Washington, local officials, with help from the federal government, have a surplus of $161 million in the city's pension fund, while the $317 million gap in funding for other retirement benefits is not as severe as that faced in other metropolitan areas.

"In Washington's case, they performed well," Mr. Draine said. "Their pensions are very well-funded. They've been one of the best cities in setting aside money to pay that cost."

Baltimore had amassed 86 percent of the money it should have for pensions, compared to an average of 74 percent around the country. But that still leaves the city with a pension funding gap of $768 million. Baltimore is also looking at a $2.4 billion gap in funding for other retirement benefits.

"In Baltimore's case, that is a city that's doing relatively well," Mr. Draine explained, "but it still has a substantial liability, even though it's smaller than other cities."

Still, there's room for improvement, even in better-financed cities such as Washington and Baltimore.

"This doesn't mean that they're in perfect shape," Mr. Draine said. "Some of them still have funding shortfalls they'll have to make up. Really, nobody did well in terms of retirement health care."

Mr. Draine said cities will have to consider some combination of raising new revenues through tax hikes, cutting spending and services, asking employees to contribute more, or cutting benefits to make up for these shortfalls.

"Policymakers need to make sure that they're not offering benefits that they can't pay for," Mr. Draine warned, "and make sure they don't take risks they can't handle. Just like a credit card bill, only buy things you can afford to pay for."

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