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Better Cities Project
  • Home
  • About Us
    Our Vision
    BCP’s vision is that free-market municipal policy solutions are broadly available, widely acceptable, and regularly employed, enabling American cities to achieve their full potential as engines of economic prosperity. We reject the idea that cities are lost to free-market principles or policies.
    Our Mission
    BCP uncovers ideas that work, promotes realistic solutions, and forges partnerships that help people in America’s largest cities live free and happy lives.
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    Address

    304 S. Jones Blvd #2826
    Las Vegas NV 89107

    Phone

    (702) 608-2046‬

    Hours

    Monday through Friday, 8 a.m. - 5 p.m.

    Email

    info@better-cities.org

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Home Economic Prosperity

Your city’s pension liability is worse than you think

Assuming unrealistically high rates of return on pension fund investments paint a misleadingly rosy picture

Patrick TuoheybyPatrick Tuohey
July 2, 2024
in Economic Prosperity
Reading Time: 2 mins read
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Your city’s pension liability is worse than you think

This image was created by BCP with the assistance of DALL·E

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The chances are very high that your city, like so many others, is facing a formidable crisis in public pension funding. A recent report by the Manhattan Institute addresses accounting practices that obscure the extent of the shortfall. More than a mere theoretical challenge; it has profound implications.

The problem is cities’ overly optimistic assumptions to calculate their liabilities, including unrealistically high rates of return on pension fund investments. As a result, pension liabilities are significantly underestimated leading to chronic underfunding.

The scale of the shortfall is impressive. The report notes that when more conservative, market-based assumptions are applied, unfunded liabilities balloon from the officially reported $1.4 trillion to over $5 trillion. This gap represents a future burden on city budgets, squeezing out funding for essential public services.

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A fiscal crisis is looming for many US cities

Cities are facing a financial doom loop

No city is unaffected. Even those with relatively better-funded systems are only one economic downturn away from significant distress. Cities like Chicago and Detroit, already struggling with underfunded pension systems, stand as stark warnings of what could happen elsewhere if leaders fail to act.

To make matters worse, Truth In Accounting has pointed out for years that cities and states engage in sleight-of-hand accounting to mask their financial situation by not properly accounting for long-term obligations such as pension commitments. Through cash basis accounting, cities often don’t count those long-term commitments toward their current solvency, allowing mayors and governors to claim their governments are running a surplus!

Like gambling addicts, we’re overestimating our odds of winning while ignoring how deep in debt we actually are.

We need a comprehensive and transparent approach to public pension accounting. Cities must adopt more realistic assumptions about investment returns and fully recognize the extent of their liabilities. This won’t be easy or painless, but it is necessary to prevent a fiscal disaster. We must also consider pension reforms that include adjusting benefits, increasing employee contributions and/or exploring hybrid pension models that combine traditional defined benefit plans with 401(k)-style plans.

It won’t be easy to confront voters with the truth of local finances, especially if they have been told for years that things are rosy. But the sooner we act the less traumatic the process will be, and the quicker we’ll see real and substantive growth.

Tags: AccountingBudgetsFiscal PolicyPublic Pensions
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Patrick Tuohey

Patrick Tuohey

Patrick Tuohey is co-founder and policy director of the Better Cities Project. He works with taxpayers, media, and policymakers to foster understanding of the consequences — sometimes unintended — of policies such as economic development, taxation, education, and transportation. He also serves as a senior fellow at Missouri's Show-Me Institute and a visiting fellow at the Virginia-based Yorktown Foundation for Public Policy.

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