"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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