Cities face obstacles to capping, reforming pensions amid surging debt

FILE - In this July 19, 2013, file photo, state-appointed emergency manager Kevyn Orr, right, and Michigan Gov. Rick Snyder, address reporters during a news conference in Detroit after Orr asked a federal judge for bankruptcy protection. (AP Photo)

Detroit's bankruptcy is casting a shadow over a long list of cities across the U.S. and giving mayors new urgency in the search for solutions to the greatest challenge to face America's cities in a generation.

While no other city is expected to join Detroit in bankruptcy court anytime soon, similar problems brought on by waning industries, crushing debt and surging pension costs plague city halls from Providence, R.I., to California, and in response mayors are proposing big changes to what was long the biggest perk of a government job: a good and reliable pension.

"It's the lesson of kicking the can down the road. You can put these things off. But at some point the bill comes due," Baltimore Mayor Stephanie Rawlings-Blake said in an interview. "People ask me sometimes what keeps me up at night. The prospect of being one of those cities is what keeps me up at night."

The total unfunded pension liability for all U.S. cities and counties is a whopping $574 billion, according to a 2010 study by economists at Northwestern University. That's a formidable burden to cities already struggling with revenue declines, debt and the ongoing cost of providing services.

Years of financial neglect left Detroit's finances in ruin, prompting its emergency manager to propose sweeping changes to the way the city doles out benefits by eliminating payment increases and creating a new 401(k)-style retirement system.

Rawlings-Blake has also proposed giving new employees a defined contribution plan, one that combines set contributions from workers and their employer, similar to the 401(k) accounts familiar to private-sector workers. The change would be just one part of an ambitious 10-year-financial plan that involves lower property taxes, a smaller city workforce and the goal of attracting 10,000 new families to Maryland's largest city.

New York Mayor Michael Bloomberg said the lesson from Detroit -- burdened by $18 billion in debt, declining revenue and huge deficits -- is that cities will ultimately pay a steep price for ignoring long-term challenges including diversification of industry, adequate funding of pension systems, population decline and debt.

Bloomberg pointed out that New York itself almost went bankrupt in 1975 -- a tumultuous time when many cities were struggling to respond to urban decay, poverty, unemployment and the rise of suburbs.

"We would be foolish to ignore the factors that drove Detroit to bankruptcy," Bloomberg said in July, shortly after the Motor City took its landmark step. "I believe that the Detroit experience holds lessons for every American city."

More and more cities are proposing replacing traditional pensions for new employees with a defined contribution plan or a hybrid that combines a defined contribution plan with a smaller traditional pension. It's been proposed in Philadelphia, and it's already the law in Rhode Island, where the state pension system covers teachers and many local workers.

Efforts to cap existing pensions, however, are often seen as a betrayal to workers who took a city job in part because of a promised pension.

Marcia Ingram spent 33 years working for Detroit's health department before retiring nine years ago. She now receives about $2,000 per month. Her pension would be capped under the proposal in Detroit.

"I feel let down by the city," said Ingram, 60. "I expected to get an increase every year like I did while I was working. Not a big increase, but it still was something."

Other cities including Stockton and San Bernardino in California and Central Falls, R.I., have sought bankruptcy protection in recent years after running out of money. In Central Falls, some retiree pensions were cut by more than 50 percent.

Changing pensions can be politically and legally perilous. Politicians who propose big pension changes risk running afoul of powerful public sector unions -- or losing in court if pension overhauls are challenged.

Some cities, like Detroit, are covered by state laws or constitutions guaranteeing pension benefits in full. In many others, mayors must plead with state lawmakers to overhaul pensions covering local teachers. And when cities operate their own pension systems, they're typically negotiated through collective bargaining, making them legally difficult to change.

Providence was on the verge of bankruptcy when Mayor Angel Taveras negotiated concessions from public-sector unions and retirees. It was part of a larger fiscal stability plan that involved raising taxes and negotiating voluntary contributions from tax-exempt institutions like Brown University.

Taveras said Providence shows that cities have an option besides bankruptcy or legal fights with unions.

"We were going to run out of money," Taveras said. "We were on the verge. We would have overcome bankruptcy, but it would have taken a decade. It would have been devastating. So we came together."

The deal suspended pension increases, shaving $178 million off the city's future pension obligations. While workers weren't happy with the deal, they appreciated the mayor's willingness to work together on a solution, according to Paul Doughty, president of the Providence Firefighter's Union.

"They opened up the books and said, `Look at anything you want,"' he said. "There was no demonizing. When someone is sticking a stick in your eye at the same time, it's almost impossible to work with them."

Chicago Mayor Rahm Emanuel said problems with Illinois' teacher pension system were to blame when 2,100 school workers -- including more than 1,000 teachers -- were recently laid off.

The city's four pension funds were 36 percent funded as of Dec. 31, 2012, and had an unfunded liability of $19.5 billion. The city estimates that without pension reform, its required contribution to the funds will more than double in the next two years, from $479.5 million in 2013 to $1.087 billion in 2015.

Emanuel urged state lawmakers to adopt an overhaul that would suspend pension increases, raise employee retirement contributions and give workers the option of a 401(k)-like account. The proposal went nowhere.

"The pension crisis is no longer around the corner," Emanuel said in July. "It has arrived at our schools."

George Mason University researchers studied financial problems in Chicago, Detroit, Baltimore, Providence, San Bernardino and Pittsburgh and found that all were facing similar problems with pension costs. Frank Shafroth, the report's principal investigator, said there are no easy solutions.

"We're going through a transition," Shafroth said of America's cities. "We'll get there. But getting from here to there is going to be one of the hardest things you can conceive of."