Pension Costs and Local Public Service Provision

• In Event: Safety Nets in Cities: Pensions, Collective Bargaining, and Redistribution

Abstract

In at least a few large cities in the United States, rising public-employee retirement costs have forced local officials to make painful decisions about retirement benefits, public service provision, taxes, and even bankruptcy. By some accounts, the events unfolding in cities like Chicago, San Jose, and Detroit are part of a much larger trend (Kiewiet and McCubbins 2014). Others argue that while states and cities with the worst-managed pensions dominate the news cycle, most state and local governments are in fairly good condition (e.g., Munnell 2012). Which of these conclusions is closer to the mark? Are local governments across the country entering into what Kiewiet and McCubbins call the “New Fiscal Ice Age,” or are the dramatic rises in retirement costs and the difficult decisions about service provision confined to a few large cities?

Given the state of existing research, it is impossible to know. There is a literature on public employee pensions, but it is almost entirely a finance literature focused on just over 100 state-administered pension plans. While there are rich annual data on these state plans back to 2001, these plan-level data do not include detail on the pension costs of particular local governments. No existing datasets allow us to evaluate the extent to which city pension costs are actually rising, or the extent to which they are leading to tax increases, cuts to local service provision, or increases in public debt. Yet for political scientists, understanding the prevalence of rising public-employee retirement costs—and the consequences for local government service provision—could not be more critical. Local governments provide a host of important public services such as education, police protection, fire protection, and refuse collection, many of which depend heavily on a government employee workforce to provide those services (for example, teachers and police officers), and all of which stand to be impacted by rising government employee retirement costs. Thus, an understanding of modern American government demands answers to questions about how retirement costs are affecting state and local budgets and services.

In this paper, I begin to answer these questions by analyzing a new dataset of the annual pension expenditures of over 400 municipal and county governments from 2005 to 2016, which I hand-collected from annual city and county financial statements. This dataset is unlike any that has existed before because it tracks actual city and county pension expenditures over time—not just in the largest cities and counties, or in the local governments with the biggest problems, but in a large, diverse set of city and county governments across the United States. With these new data, we can see for the first time what American local governments are spending on their employees’ pensions and how that has changed over a 12-year period. In addition, for each of the cities and counties, I have detailed annual data on local finances and employment from the Census of Governments. By combining the finance and employment data with the pension costs data, I will be able to answer a number of questions about how local governments are coping with rising pension costs: Have they pursued increases in revenue, and if so, in what forms? Are they employing fewer people, perhaps reducing the size of the police force or the fire department? And does the strength of public-sector unions affect the amount of local spending on retirement costs, the degree to which retirement costs have changed, or the way in which local governments have responded to any changes? The second part of my analysis will allow me to draw conclusions about the consequences of rising pension costs, thereby completing the assessment of whether we are, in fact, experiencing a New Fiscal Ice Age—an era in which local government provides less service at higher cost.

REFERENCES

Kiewiet, D.R., and M.D. McCubbins. 2014. “State and Local Government Finance: The New Fiscal Ice Age.” Annual Review of Political Science 17: 105-22.

Munnell, A.H. 2012. State and Local Pensions: What Now? Washington, DC: Brookings.

Author

• Sarah F. Anzia, University of California, Berkeley