Tensions Rise for Local Leaders Trying to Fund Pensions

In light of our just-released State of the Cities 2018 report, this post is the first in a series of blogs that captures what mayors have been talking about most in 2018.

According to this May’s State of the Cities 2018 report, intergovernmental relations was a topic of concern for many mayors. Interestingly, mayors across the country focused on one issue in particular: funding pensions.

During the period from January 1 to April 18, 2018, 18 of the 160 mayors (11 percent) that we studied focused their state of the city addresses on pensions. Over and over again, mayors talked about their distrust of their state pension systems, and their frustration with not being able to effect change.

Approximately 88 percent of local government members belong to a statewide pension system. Additionally, nearly 60 percent of cities and other local governments are required to make pension contributions to the state system. Many cities feel as though any change — from increasing employee contributions and reducing benefits to increasing the retirement age — tends to happen in a vacuum at the state level without any input from the cities.

Mayors addressing pensions in their 2018 state of the city speech, by population size

sotc dashboard
The online report includes an interactive dashboard containing all 182 subtopics discussed in State of the Cities 2018.

Without the cooperation of the state, some cities are forced to cut services and adjust their budgets to afford their contributions. While several large cities (considered here as those with a population of 300,000 or more) — such as Atlanta, Baltimore, Boston and Los Angeles — have their own pension plans, some do not.

One example is Louisville, Kentucky (Louisville-Jefferson County does have its own fund for firefighters). In Louisville, the city is calling on the state for relief.

“Because of a shortfall in the state pension system, unless Frankfort acts, Metro Government’s obligations will increase by $38 million this year alone… this will be difficult for the people of Louisville, and force Metro Government to reduce existing services,” said Louisville Mayor Greg Fischer.

Even for a city like Providence, Rhode Island, which does administer its own employees’ retirement system, Mayor Jorge Elorza is working toward resolving his city’s pension issues and calling on his constituents’ help in “pushing at the statehouse to make sure it happens.”

This wariness is felt even more acutely in smaller cities. Mayor Terry Tornek of Pasadena, California, a city of about 142,000 people, noted an increase from 7.5 percent to 13.9 percent of the city’s General Fund budget, due to the underperformance in California Public Employees’ Retirement System (CalPERS) investments. “[It] is an obligation that is largely beyond our control.”

Similarly, Mayor Jim Ardis of Peoria, Illinois, a city of about 115,000 people, said: “If there is ONE thing that is going to implode our city and our state’s budget, it is unfunded pension liability. In Peoria, it’s $300 million. In the state it’s over $130 billion. Springfield created it and they need to reform it. It’s unsustainable. Period.”

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Each state has a different model. In Arizona, the Public Safety Personnel Retirement System (PSPRS) is administered by the state, which has been requiring cities and towns to make accelerated payments in the wake of the Supreme Court’s decision in Parker vs. PRPRS, which recommended that affected members work with their employers to receive a return of any excess contributions made.

“Our city manager and department heads continue the Herculean task of balancing our budget … For Tucson, this means that the city’s contribution to PSPRS … will be $83 million in fiscal year 2018 — 15% of the city’s general fund,” said Tucson’s Mayor Jonathan Rothschild.

Some cities appear hopeful, despite receiving little to no assurance from the state. Mayor Salvatore Panto of Easton, Pennsylvania, said, “There is no doubt that after lobbying and working for 30 years with state agencies and the Legislature we still don’t have pension reform in our state. Our pension legacy costs are now more than $6 million a year.”

And some cities are providing solutions. For example, in Binghamton, New York, Mayor Richard David is creating savings funds to offset increases in health insurance and pension costs. “This is one of the most important financial policies we can implement to eliminate wild tax increases long after I’m out of office,” he said.

Meanwhile, in La Mesa, California, Mayor Mark Arapostathis is supporting continued investment in a Section 115 retirement trust fund to help with long-term pension obligations.

Furthermore, Fremont, California, Mayor Lily Mei is including additional pension contributions into each year’s budget cycle. “We expect that consistently following this policy will assist us to stabilize our annual pension costs and provide future budgetary relief.”

Similarly, in Alpena, Michigan, City Manager Greg Sundin approved a one percent increase in city contributions to contributing employees’ individual deferred compensation funds in an effort to encourage savings toward retirement.

Although some cities are forced to increase their pension contributions, they are doing so purposefully and strategically. And some cities are even able to create a cushion for the future through savings and retirement trust funds.

As large segments of our workforce continue to age, it will be increasingly important for cities to ensure that pensions remain adequately funded. Although local leaders continue to do more with less, it is imperative that the state governments let these local leaders have a place at the table.

Anita_Yadavalli2_ready.jpgAbout the Author: Anita Yadavalli is the Program Director of City Fiscal Policy at NLC. Anita leads NLC’s Public Sector Retirement initiative, with a focus on research and education for city leaders on retiree healthcare benefits, as well as research and programming on other city fiscal policy issues. Anita holds a Ph.D. in Agricultural Economics from Purdue University, an M.S. in Food and Business Economics from Rutgers University, and a B.S. in Environmental and Business Economics from Rutgers University.