Study Finds Pension, OPEB Costs Manageable for Most Governments

When it comes to public employee retirement costs, many commentators make sweeping claims in alarming language about the liabilities of state pension plans. However, a study from the Center for Retirement Research at Boston College indicates liabilities for most governments are manageable.

The researchers say looking at aggregate costs ignores the heterogeneity of the situation across governments.  For example, New Jersey, Illinois, and Connecticut clearly have very large pension costs relative to their revenue base, but their situation is atypical. The overall state average of 4.3% is far below that of the most troubled states; and Florida, Iowa, and Nebraska have a cost burden much lower than the average. 

The researchers looked at the allocation to cities and counties of their share of the pension and other post-employment benefits (OPEB) obligations. Even accounting for the fact that, on average, own-source revenue is only 67% of county net revenue, some counties face extremely high costs. Six counties in California have costs in excess of 40% or more of own-source revenue, along with Cook County in Illinois, and Prince Georges County in Maryland. However, costs for many of the other large counties pose a manageable burden. 

As with counties, even though own-source revenue is smaller than city net revenue, costs are extremely high for some localities. Chicago, Detroit, San Jose, Miami, Houston, Baltimore, Wichita and Portland lead the list, all with costs in excess of 40% of revenue. However, as with counties, many of the other large cities face a manageable burden.

“The good news is that the total costs for long-term commitments—pensions, OPEBs, and debt service—appear to be under control in many jurisdictions,” the researchers conclude in their report. 

For the worst-off states, counties and cities, to improve their situation four options exist:

• Pray for higher returns – Unfortunately, the researchers say, returns would have to be consistently in the 10% to 15% range for the next 30 years to solve the problem—an unlikely outcome given today’s financial markets; 
• Raise taxes to meet the required commitments – Unfortunately, many of the states with the greatest burden already have relatively high taxes, the researchers note; 
• Cut other spending by 10% to 20%; and
• Raise employee contributions even beyond what they are already contributing to their plans.

The Issue Brief, “Will Pensions and OPEBs Break State and Local Budgets?” may be downloaded from here.