Big US cities could be squeezed by unfunded public pensions as they and counties face a $574 billion funding gap, a study to be released on Tuesday shows. The gap at the municipal level would be in addition to $3,000 billion in unfunded liabilities already estimated for state-run pensions, according to research from the Kellogg School of Management at Northwestern University and the University of Rochester.
“What is yet to be seen is how this burden will be distributed between state and local governments and whether the federal government will be called upon for bail-outs,” said Joshua Rauh of the Kellogg School.
The financial demands of unfunded pension promises come as state and local governments grapple with years of falling tax revenue related to the recession.
The combination has raised concern that defaults, which are historically rare in the $2,800 billion municipal bond market where local governments obtain money, could now rise.
“The bondholders would be competing with the pension beneficiaries for scarce government resources,” Mr Rauh said.
Current pension assets for plans sponsored by Philadelphia can only pay for promised benefits through 2015, while Boston and Chicago would deplete their existing funds by 2019.
Cincinnati, Jacksonville, Florida and St Paul have current pension assets that can only pay for promised benefits through 2020.
Local governments use unique accounting methods that many, such as Mr Rauh, believe understate obligations. Based on his estimates, which use US Treasuries as the benchmark, each household already owes an average of $14,165 to current and former municipal public employees in the 50 cities and counties studied.
“Philadelphia has the most immediate cause for concern, as the city can pay existing promises with existing assets only through 2015,” Mr Rauh said, assuming an 8 percent annualized return, the most common benchmark for municipal plans.
In New York City, San Francisco and Boston the total is more than $30,000 a household and, in Chicago, it tops $40,000.
Taxpayers in these areas risk not only local tax increases and service cuts to pay for benefits, but potentially some of the bill for the $3,000 billion unfunded obligations at the state level, the researchers say.
“The fact that there is such a large burden of public employee pensions concentrated in urban metropolitan areas threatens the long-run economic viability of these cities, as residents can potentially move elsewhere to escape the situation,” Mr Rauh said.
The research examines 77 pension plans sponsored by 50 major cities and counties and covering about 2 million workers, which is estimated to be two-thirds of workers covered by local pensions. Researchers then extrapolated the results – an unfunded liability of about $5,300 per worker – to come up with the total estimate of $574 billion.
