A financial burden on future taxpayers is becoming heavier say analysts who study public pension systems, and it seems to be highlighted with the release of a report on city pension plans which finds that 25 of the most populous U.S. cities have more than $125 billion of unfunded pension liabilities.
Rachel Barkley, a municipal credit analyst for Morningstar, has stated in “The State of City Pension Plans 2013: A Deep Dive into Shortfalls and Surpluses" research project from Morningstar Inc.:
"Governing entities and the taxpaying public are beginning to acknowledge the potentially chronic consequences of looming pension liabilities. Headlines warn of an impending pension crisis while ever-escalating pension costs and liabilities have induced new, sometimes unrelenting, pressure on the finances of state and local governments that are still recovering from the recession."
In addition to the discovery that the 25 most populous U.S. cities have more than $125 billion of unfunded pension liabilities, Barkley also notes that twenty-two of the largest cities have a majority of their pension liabilities tied to a pension plan where the city is the major participant.
This means, she believes, that the pension liability will have to be funded either solely or mainly by the city.
From the report, Barkley also throws a red flag up and states:
"In some extreme cases, pension liabilities have served as key drivers for municipalities filing for bankruptcy. Current data indicates these pressures are expected to persist or even intensify. In late 2012, the actuarial firm Milliman found a $1.2 trillion gap for the largest 100 U.S. public pension plans while actuarial reports for a large portion of these plans project sizable increases in required contributions in order to fully fund these liabilities."
Seven of the report's evaluated cities actually fall below what Morningstar considers to be a fiscally sound threshold of a 70 percent funded ratio. Chicago, noted to be "the weakest-funded city pension system" among the cities reviewed in the report, had the lowest funded ratio of 35.2 percent.
In an online article at reason.com, titled "How to break an American city:The municipal bankruptcy mess is heading to a local government near you," regarding the problem, it states:
"... public sector unions fight to maintain their untenable health and pension benefits, local officials and development agencies keep pinning their hopes on shiny government-managed economic projects that ultimately benefit private-sector cronies, and city leaders continue to make the same poor choices that got them into trouble in the first place, thinking they'll dig their way out eventually-or just fob the problem off on their successors."
The article at reason.com mentions a 2012 poll of members taken by the National League of Cities, an organization representing thousands of American municipalities, "to determine the most popular methods for coping with personnel costs at a time of economic stagnation and declining tax revenue."
Besides hiring freezes, pay cuts, and layoffs placed at the top of the list, reason.com's story states that "changing union contracts, cutting back health care benefits, and reforming pension funds" were placed at the bottom of the list. Further, the story says:
"This despite the fact that seven out of 10 city finance directors said public-employee benefits were having significant negative impacts on their budgets, more so than actual wages. Officials are unable or unwilling to confront the root causes of municipal decrepitude."
The Senate Finance Committee's Ranking Member U.S. Senator Orrin Hatch, addressed the public pension debt crisis over the summer, stating:
“America cannot continue sleepwalking into the financial disaster that awaits us if we do not get the public pension debt crisis under control. The problem is getting more serious every day and cannot be remedied merely by fine-tuning the existing pension structures available to public employers. A new public pension design is needed: one that provides cost certainty for state and local taxpayers, retirement income security for state and local employees, and does not include an explicit or implicit federal government guarantee.”
Hatch unveiled the legislation called the "Secure Annuities for Employee (SAFE) Retirement Act of 2013" which intends to "strengthen and reform much of the nation’s public and private pension benefit system."
For more info on the bill, see this link at opencongress.org.
Note: For the City of Vista, in 2011 at a public forum with City leaders and staff, I was informed the unfunded liabilites were at $6,000,000.