Are City Fiscal Woes Widespread? Are Pensions the Cause?

Alicia Munnell, Jean-Pierre Aubry, Josh Hurwitz and Mark Cafarelli

State and Local Pension Plans Briefs from Center for Retirement Research

Abstract: The bankruptcy of Detroit has focused attention on the financial outlook for cities and the role that pensions may play in determining their future. Some commentators presume that excessive unfunded pension commitments will lead to widespread ba nkruptcies. Chicago is frequently cited as the poster child of a city where substantial pension commitments and lack of funding have led to serious financial problems. The question is whether Chicago is unique or the tip of the iceberg. To answer that q uestion, this brief explores the extent to which economic factors, poor fiscal management, and high pension costs contribute to cities being in the news for financial problems. The discussion proceeds as follows. The first section describes the rationale for using press reports to identify troubled cities and the sample of cities included in the analysis. Since one-third of the troubled cities are located in California, the seco nd section explores possible explanations for its high incidence of financial problems. The third section presents a regression that relates the probability of being in the news to economic, management, and pension factors. The fourth section presents a twofold conclusion. First, the image that American cities are about to topple like dominoes is not accurate. About 13 percent of the cities and towns in our local sample has been cited in the press as having financial problems, which is not surprising in the wake of the 2008 financial crisis and the Great Recession. Second, fiscal mismanagement and economic issues are more important than pensions in explaining why cities are identified as being in financial trouble.

Pages: 10 pages
Date: 2013-12
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Journal Article: Are City Fiscal Woes Widespread? Are Pensions the Cause? (2014)
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