Local Pensions: A Crisis

We spend much of our time discussing and pointing out the precarious state of our federal budget. But the federal budget isn't the only area of public finances facing serious challenges. States, counties, and cities are, as the media has been reporting, also in crisis. In a paper released today, Robert Novy-Marx of the Unviersity of Rochester and Joshua Rauh of Northwestern University warn that state, city and county pension systems are in horrible shape.

Novy-Marx and Rauh write that the current process our localities (i.e. any country, city, town, municipality) use to calculate pensions is flawed and overstates their assets by understating the investment risks. By re-engineering the accounting data, they examined two-thirds of all pension users (only 3 percent of all the plans, but they used the most populous cities) and found that 50 cities' (77 plans) pension plans are underfunded by $383 billion. They make a rough extrapolation that the total could be $574 billion of unfunded liabilities if there is a linear relationship. 

Furthermore, Novy-Marx and Rauh identify 6 areas where, they estimate, public coffers will not be able to meet pension promises through 2020 (Philadelphia, Boston, Chicago, Cincinnati, Jacksonville, St. Paul). An additional 20 will not be able to meet their promises through 2025 (New York City, Baltimore, Dekalb County, Fulton County, Kern County, Baltimore County, Detroit, Forth Worth, Phoenix, Sonoma County, Nashville and Davidson County, San Joaquin County, San Mateo County, Seattle, Constra Costa County, Cook County, Montgomery County and Orange County).

The research highlights the precarious state of local government finances. It also brings into question the notion that our localities must and always do balance their budgets when many have millions, if not billions of dollars in unfunded liabilities that must be paid. It is clear that like the federal government, our localities, which are even more prone to bond rate changes, must get their fiscal houses in order.