Mayor Marvin's Column: Escalating Pension Obligations

I have written quite often about the unsustainability of municipal pension and healthcare costs and unfortunately my fears have come to fruition, most notably in the State of California.

Just this past week, the City of Stockton had the dubious distinction of being the largest city in the United States ever to file for bankruptcy.

All eyes are now on Stockton because many in government believe it to be a template for predicted future bankruptcies as it is a representation of the “new breed” of failing cities.

Municipal bankruptcies in the past were caused by incredibly poor investment schemes or ill conceived public works projects gone awry.  Stockton represents the new normal.  It self destructed because of routine costs such as escalating pension obligations combined with greatly depressed mortgage tax revenue.

The Stockton situation brings to the fore the issue of whether pensions are contract rights that can be modified or property rights protected by the U.S. Constitution.  This premise has never been tested in court but I predict it will be a watershed case for the Supreme Court in the not too distant future.

Bankruptcy also impacts a municipality’s credit rating making borrowing for needed repairs and rejuvenation much more expensive, begging the question whether Stockton can ever recover.

Nearby San Jose finds itself in a similar predicament.  Over the last decade, funds raised through property taxes and general revenues rose 21% while the average cost per employee rose 87% and the cost for a uniformed employee rose 99%. 

The result is the average cost per employer with all benefits included is $180,000 per year with pension contributions the major driver.  In the last fiscal year alone, city pension obligations rose from $137 million to $177 million.  San Jose is now grappling with an unfunded liability of $1.1 billion for its pension system and $1.2 billion for retiree healthcare benefits.  Annual costs for retirement benefits now exceed revenues from property taxes.

The net result of these overwhelming obligations is that San Jose has whittled away its job opportunities and with that many services.  There are now 1,000 fewer employees than just five years ago and community pools, civic centers and libraries have closed.

To try to avoid the bankruptcy route, San Jose as well as San Diego overwhelmingly voted for charter revisions that reduce benefit packages for public employees.

The need to address the elephant in the room has now spread east.  Massachusetts Governor Deval Patrick, who received overwhelming union support, signed a pension bill this year that raises the minimum age of retirement in Massachusetts from 55 to 60.

Governor Chaffee in Rhode Island signed a pension reform bill into law and is now seeking authority to allow cities to reduce benefits to retirees.

The Rhode Island Legislature saw the writing on the wall as Providence was on the brink of bankruptcy.  The threat of bankruptcy is a powerful lever if it is a realistic threat and it was in the case of Providence.  As a result, labor unions, representatives of retirees and city officials came to the table in May and worked out a compromise that will now save the city at least $18.5 million per year going forward.

New York State and even our Village are not immune.  On the Village level, the decreased hours at the library, the fewer streets we pave and the 15% shrinkage in our work force is a direct consequence of our escalating pension obligations.

Sadly, the New York State Legislature has yet to face the gravity of the situation as they ended this year’s session with no significant mandate relief initiatives passed.  This is extremely short sighted because when residents have to pay unsustainable levels of taxes to cover pension and healthcare costs, they often move out of the State to reduce their burden.  

Then communities and even the State can go into the spiral when fewer and fewer residents are left to then shoulder an even larger burden.  New York State just lost two Congressional seats as a result of the decline in population as tabulated in the 2010 Census so the evidence is clear that this phenomenon has begun.

The public pension system seems the only financial system that is not subject to economic factors as is a 401K or IRA, but rather the political vagaries of elected officials.  It is time the electeds in Albany make their duty as stewards of our tax dollars their number one priority.