Cities chart course through pension morass

American cities confront pension problems years in the making

PROVIDENCE, R.I. (AP) -- In Philadelphia, pension costs doubled in a single decade. Cities in Rhode Island dimmed streetlights, raised taxes and put off road repairs. Stockton, Calif., fell into bankruptcy.

Unpaid bills from decades of retirement promises made to public workers, combined with a lackluster economy and steep Wall Street losses, have built up a financial mountain that threatens to overwhelm budgets and operations in cities and counties across the country.

While it hasn't gotten the attention of the "fiscal cliff" in Washington, the pension crisis at City Hall could have similar effects as mayors are forced to raise taxes, cut government services or renege on retirement promises made to police officers, firefighters, teachers and other public workers.

"It's not about assigning blame, because look, these numbers are staring us in the face," said Allan Fung, the mayor of Cranston, R.I., where the pension fund is only 16 percent funded and the city needs $270 million to meet its pension obligations. "It's a dire situation for us and for many cities and towns around the country. It's a recipe for disaster at the worst economic time possible."

Collectively, American municipalities face nearly $600 billion in unfunded pension obligations. The problem arose in many cities because local leaders for decades failed to properly fund retirement systems. Longer-living retirees and rising health care costs drove costs higher.

Then came the economic downturn, in which investment losses decimated even relatively well-off pension funds. San Diego's unfunded pension liability surged from $1.3 billion in 2008 to $2.11 billion in 2009.

In Philadelphia, the city's annual pension costs are now calculated to be well over $500 million — up from $200 million a decade ago. The city's total annual budget is $3.5 billion and it faces a gap of $4.5 billion between what is promised to workers and what is set aside to pay for those benefits.

Unions argue workers aren't to blame for poor investments or past failures to fund pension systems. Anthony Martin, a Chicago fire lieutenant and trustee of his public pension fund, said he has seen records going back to 1877 showing the retirement system was underfunded even then.

"You have a dysfunction in government that is hard to overcome," Martin said. "Year after year they kicked the can down the road."

There's some evidence that may be changing, however, as mayors find they can no longer ignore mounting pension bills. Providence Mayor Angel Taveras successfully negotiated concessions with unions and retirees to shave $178 million off the city's future pension obligations. The city had faced $903 million in future pension costs, which Taveras had said could force the city into bankruptcy.

"Through collaboration, we have pulled Rhode Island's capital city back from the brink of bankruptcy while sparing taxpayers the unnecessary expense of a long, costly legal challenge that threatened our future," he said after the police union voted to accept the agreement, which will suspend pension increases and eliminate the practice of giving some workers compounded 5 or 6 percent pension increases annually.

The negotiated settlement is among the first of its kind in the country, and could foreshadow similar deals in other cities.

States around the country face even more expensive problems in their own retirement systems — $1.4 trillion at last estimate. But mayors face a pension puzzle that can be even more challenging. State retirement benefits are often set through statute, but local pensions are typically negotiated through collective bargaining, making them much harder to break unilaterally.

Rhode Island had one of the nation's worst pension problems before lawmakers passed a sweeping overhaul in 2011 that suspended pension increases, raised retirement ages and created a new benefit that merged traditional pensions with 401(k) plans. The moves — now being challenged in court — will save an estimated $4 billion in coming decades.

The changes affect teachers, state workers and municipal employees and retirees who participate in the state's pension system. Despite pleas from mayors and Gov. Lincoln Chafee, municipal pension plans were left out of the overhaul. Top lawmakers said it was up to mayors to negotiate pension concessions.

In Illinois, state law sets retirement benefits for all public employees, including city workers and Chicago Public Schools teachers. That means Chicago Mayor Rahm Emanuel must head to the Capitol in Springfield to lobby for any changes. In May, he told lawmakers that if they didn't pass reforms he would be forced to choose between letting the funds go bankrupt or increasing property taxes by 150 percent.

"As long as I am mayor of Chicago, that is a burden I refuse to put on the backs of our taxpayers," Emanuel told members of the House pension committee.

Bankruptcy is another option — though one officials are loathe to consider.

The state-appointed receiver in charge of Central Falls, R.I., filed for bankruptcy on behalf of the city in 2011. He went on to slash pensions for retirees by up to 55 percent. The retirees had refused to agree to take voluntary cuts, though the receiver warned that he was prepared to take unilateral action. He said the retirees' choice was between a "haircut or a beheading."

"They stuck it to us," said Bruce Ogni, who retired as a captain from the Central Falls Police Department. His $41,000 pension was cut to $29,000. "We were told if we didn't take the deal they might stop the pensions altogether. We took the hit for other people's mistakes."

Stockton, Calif., filed for bankruptcy protection in June, becoming the largest American city to take such a drastic step. Officials cited the housing collapse, a struggling local economy and pensions. While pensions in Stockton won't be impacted by the bankruptcy filing, health benefits for employees and retirees are on the table. The unfunded liability for those benefits stands at $417 million.

An August report by Moody's Investors Service that predicted more bankruptcies and defaults in California as cities and towns reel from the collapse of the housing market, the downturn and rising pension costs.

Residents in San Jose voted this summer to cut the pension benefits for city workers. San Diego residents approved similar changes in June, voting to change the way pensions are calculated and place all new hires — except police officers — into a 401(k)-style plan.

Jack Canning, a 62-year-old civil engineer for the city of San Diego, said pay cuts and freezes forced him to postpone retirement for two years until he turns 67.

Still, he considers himself lucky. Newer employees with inferior pension benefits resent veterans like him.

"People say stuff to me like, 'Why are we holding onto pension benefits that you guys have and we don't?'" he said.


Contributing to this report were Associated Press writers Sara Burnett in Chicago, Elliot Spagat in San Diego, Ben Nuckols in Washington, Christina Almeida in Atlanta, Marc Levy in Harrisburg, Amanda Lee Myers in Cincinnati and Kevin McGill in New Orleans.