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Monday
Dec132010

Public Pensions in America's Biggest Cities Face Underfunding Crisis

Photo Courtesy - Getty Images(EVANSTON, Ill.) -- Two professors of finance are giving a sharp rap on the knuckles to Philadelphia, Boston, Chicago and other major cities.  Their warning: better fix your pension problems fast.

An analysis by Robert Novy-Marx of the University of Rochester and Joshua Rauh of the Kellogg School of Management finds that public pension plans for America's 50 biggest cities and counties are underfunded by $382 billion -- or $14,000 for every household in those same cities.  Some of the biggest plans may run out of money to pay promised benefits in as little as five to eight years.

Michael Zuccht, general manager of the San Diego Municipal Employees Association, says the problem has been building for decades.  Year after year, municipalities have put off fully funding their pension obligations, just kicking the can down the road.  Now, though, with the Baby Boom retiring, that road is running out.

"For 30 years elected officials have failed to meet these 'boring' obligations," says Zuccht, referring to his city's and others' pension plans.  "They preferred to spend their money on 'exciting' things like parks and libraries and recreation.  Guess what?  It's come due now.  It's hit the fan."

Cities claim their liability is less -- only $190 billion, or $7,000 per household.  But Rauh and Novy-Marx say this lower figure is the result of government accounting that assumes too rosy a return on assets and underestimates the cost of pension promises.  The professors use private sector accounting standards, then calculate how long the assets in each fund (as of June 2009) could keep paying out the benefits promised, as of that same date.

Philly, by their reckoning, has just five years until it can't pay.  Boston, Chicago and New York, have eight.

Of the 50 cities in the study, 20 won't be able to pay their promised benefits after 2025.

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