Friday, December 20, 2013

Are City Fiscal Woes Widespread? Are Pensions the Cause? By Alicia H. Munnell, Jean-Pierre Aubry, Josh Hurwitz, and Marl Cafarelli of the Center for Retirement Research at Boston College

"The bankruptcy of Detroit has focused attention on the financial outlook for cities and the role that pensions may play in determining their future. Some commentators presume that excessive unfunded pension commitments will lead to widespread bankruptcies. Chicago is frequently cited as the poster child of a city where substantial pension commitments and lack of funding have led to serious financial problems. The question is whether Chicago is unique or the tip of the iceberg…

"First, the image that American cities are about to topple like dominoes is not accurate. About 13 percent of the cities and towns in our local sample has been cited in the press as having financial problems, which is not surprising in the wake of the 2008 financial crisis and the Great Recession. Second, fiscal mismanagement and economic issues are more important than pensions in explaining why cities are identified as being in financial trouble…

"Detroit’s bankruptcy has put American cities in the news. Chicago’s seemingly intractable financial problems and large unfunded pension liabilities have upped the ante. The question is whether cities across the country are about to topple like dominoes. And whether pensions are the problem. The answer appears to be “no” on both fronts.

"Of our original sample, 13 percent were cited in the press between 2008 and 2013 as having financial problems. This period saw the financial crisis and the worst recession since the Great Depression. Many of the troubled cities are located in California, where the state had largely lost control of its finances, where public pensions are among the highest cost in the nation, and where the bursting of the housing bubble wreaked havoc. Outside of California, the incidence of troubled cities appears to be scattered and varying in severity.

"Moreover, when identifying the source of the problems, fiscal mismanagement leads the list. Economic problems, in large part a response to the financial crisis and ensuing recession, come in second. Pensions do play a role, but that role is much smaller than the other considerations. In short, troubled cities do exist, but are not as widespread as some commentators suggest. And pensions do play a role, but they are not the major factor."

From a study entitled “Are City Fiscal Woes Widespread? Are Pensions the Cause?” By Alicia H. Munnell…

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