Association for Public Policy Analysis & Management

In at least a few cities, rising pension costs have forced local officials to make painful decisions about pension benefits, employee contributions, service provision, taxes, and debt.  By some accounts, the events unfolding in these cities are part of a much larger trend (Kiewiet and McCubbins 2014).  Others argue that while states and cities with the worst-managed pensions dominate the news cycle, most state and local governments are in fairly good condition (e.g., Munnell 2012).  Which of these conclusions is closer to the mark?  Are local governments across the country entering into what Kiewiet and McCubbins call the “New Fiscal Ice Age,” or are the dramatic rises in pension costs confined to a few cities?

Given the state of existing research, it is impossible to know.  There is a literature on public employee pensions, but it is almost entirely a finance literature focused on just over 100 state-administered pension plans.  While there are rich annual data on these state plans back to 2001, these plan-level data do not include detail on the pension costs of particular local governments.  No existing datasets allow us to evaluate the extent to which city pension costs are actually rising, or the extent to which they are crowding out other expenditures.

For this paper, I am building a new dataset that will enable such an analysis.  By collecting the annual financial statements of 236 cities for every year from 2005 to 2014, I am tracking how much each city spends on its public employees’ pensions and how that has changed over the last 10 years.  This, alone, will be a major contribution:  it will allow me to establish what pension costs actually look like in American local governments, not just in the largest cities, and not just in the cities with the biggest problems, but instead in a large, diverse set of cities.  But the dataset will have another component as well—one that is critical to an assessment of how pension costs are affecting local government.  For each of the 236 cities, I have detailed annual data on city finances and employment from the Census of Governments.  By combining the finance and employment data with the pension costs data, I will be able to answer a number of questions about how cities are coping with rising pension costs:  Have cities pursued increases in revenue, and if so, in what forms?  Have they reduced expenditures, and if so, in what functional areas?  Are they hiring fewer employees, perhaps reducing the size of the police force or the fire department?  And to what extent are cities coping with increased pension costs by taking on more debt, particularly by issuing pension obligation bonds?  The second part of the paper, then, will assess how local governments are dealing with rising pension costs.

REFERENCES

Kiewiet, D.R., and M.D. McCubbins. 2014. “State and Local Government Finance: The New Fiscal Ice Age.” Annual Review of Political Science 17: 105-22.

Munnell, A.H. 2012. State and Local Pensions: What Now? Washington, DC: Brookings.