Money Coach
11:35 am
Tue October 22, 2013

Cities Grapple With Pension Debt

Transcript

MICHEL MARTIN, HOST:

I'm Michel Martin and this is TELL ME MORE from NPR News. Later in the program, we'll hear about the latest project by Harvard professor and documentary filmmaker Henry Louis Gates Jr. It's a sweeping six-part series about the history of Africans in the Americas dating back to the 1500s. He'll tell us more about that in just a few minutes.

But first, to matters of personal finance. Now we've been talking about the fight over the budget that led to the federal government shutdown, but budget fights are not just a Washington issue. Many state and local governments have been budget-challenged in recent years, and some of the leaders of these jurisdictions are pointing the finger at massive pension obligations to current and future retirees. Now Detroit is probably the poster child for this. The city's emergency manager has been considering freezing pension payouts, but they are not the only ones. So while politicians debate the issue, workers or retired workers are understandably concerned that they could find their retirement funds in danger. We wanted to try to sort some of this out, so we've called upon Michael Fletcher. He's a national economics correspondent for the Washington Post, and he recently wrote about this. And he's with us now. Welcome back. Thanks so much for joining us once again.

MICHAEL FLETCHER: Good to be here, Michel.

MARTIN: So we wanted to talk about both the personal and the political in the time that we have. How big of an issue are pension obligations? I mean, what role do they play in local government budget pressures right now?

FLETCHER: You know, that's a really good question 'cause you hear these really big numbers thrown around in terms of pension deficits, and they are a problem. The Pew Center on the states estimates that there's a pension shortfall of about 1.4 trillion dollars - trillion with a T. So that's big, big money. But the thing to keep in mind when you hear these numbers is that pension obligations don't have to all be paid at once. It's a little bit like a mortgage where it's paid out of a long window of time - 30 years, typically, is the way they account for this. So while it's a lot of money, it's not unbearable, at least for most cities and states, even though there are many exceptions. And Detroit is one of them that you mentioned.

MARTIN: Well, when use the term shortfall, what exactly do you mean? Are you saying that the overall liability exceeds their current revenues? Why would that be relevant since you don't pay them all at once?

FLETCHER: Well, you know, it's like any actuarial table. You have to worry about how much income you're going to have. And a number of things go into these estimates - how much income you expect to earn on your assets that you have in your pension fund. So they make investments. If the stock market's doing poorly, that increases the liability. When interest rates are low, that often increases liability or encourages pension managers to take more risks to try to earn the returns they need.

So the shortfall is - just as you described it - the difference between the expected payouts over time and the expected revenue over time. So you have kind of an estimate laid on top of an estimate. That's why these numbers tend to move around a lot. When we came out of this recent recession with the stock market crash and everything, the liabilities shot through the roof. But now that we're getting back on more solid footing, the numbers are beginning to shrink, but they still are worrisome.

MARTIN: So are there - can you just give us a ballpark estimate of how many local governments are - have a worrisome situation, as you put it?

FLETCHER: Well, there are a number of them. I don't know the exact number, but you hear talk. Chicago has a big pension problem. Mayor Rahm Emanuel has talked about the need to reduce pensions going forward, to do something to reform pensions. The state of Illinois, generally, is seen as the most poorly funded state when it comes to pensions. And Governor Quinn there has tried repeatedly to impose pension reform, but the legislature has yet to go along. But something's going to have to give because they have severe shortfalls. But even in these scenarios, you're not talking about people losing completely their pensions in a city like Chicago. It's not like Detroit, which suffered massive problems beyond their pension fund. The city, you know, it lost so much population. It lost much of its tax base. So they didn't have the ability to tax more to raise more revenue. In Chicago, that remains an option. Employees could chip in more to their pensions. So they have options, even though you're going to see a pension reform in that city in the next year or two, and I would predict you'd see the same in Illinois.

And before this, you've seen bankruptcies in Stockton, California, in San Bernardino, California, in Jefferson County, Alabama, which includes Birmingham. And those weren't pension related, but nonetheless, pensions were swept up in the conversation once these places went into bankruptcy.

MARTIN: Well, I'm sure that people who are municipal workers, who are hearing this would be concerned. And so I want to save some time to talk about what you can do if you are concerned. But before we do, I do have to just ask you that there are those who believe that that's just an inflated or a made-up story. I mean, the columnist David Sirota and Matt Taibbi, the investigative reporter, have been writing about this separately and together. And their argument is that this is really a kind of an inflated anxiety meant to try to steer municipal governments to pushing these large amounts of funds into privately managed funds, which will then generate lots of money for pension managers.

FLETCHER: Well...

MARTIN: And what's your take on that?

FLETCHER: Well, I mean there's - I think there is a push in many corners to push this off, you know, kind of off the municipal balance sheet, if you will, and have everyone kind of take care of their own retirement. But I think that's not, you know, that's not a good plan for most people. Most people would not be able to save enough money. And I think there's something to be said for the idea that most cities are OK. I mean, they have a shortfall. They can make adjustments around the side.

They don't have to throw away their entire guaranteed pension system in order to get by. Now that said, there are a couple of exceptions, like Detroit is chief among them. You know, the city of Harrisburg is looking at severe financial problems. So I would think those severe cases are more the exception than the rule. And to that degree, I think Mr. Sirota's correct. I mean, I don't know that there's a conspiracy the way he says. But certainly, I don't think the remedy's necessarily that everyone has to get into a 401 (k).

MARTIN: We only have about a minute left. So what is the remedy? If you are a municipal worker and particularly if you're close to retirement, do you have any choices? I mean, can you take money out of a defined benefit pension plan and put it into one of those defined contribution plans. And a lot of private-sector workers now have 401(k)s, 403 (b)s...

FLETCHER: Yeah, exactly.

MARTIN: ...Those kind of things.

FLETCHER: You know...

MARTIN: Is there anything you can do?

FLETCHER: What you need to do is save money otherwise, if you can swing that. And that's been a problem. So many people are not ready for retirement. As they get closer to retirement, Americans are carrying more debt than ever. But if you can afford it, you need to save money otherwise. You wouldn't want to move your money out of your defined benefit pension. They're not going to just crash and burn and not pay anything. I think it will still be a better payout for people to keep their money in their pension plan, even if the pension plan is stressed.

MARTIN: All right.

FLETCHER: I mean, typically, what you've earned, you're going to get.

MARTIN: OK. Well, we'll keep following this, and I think you will, too. So keep us posted.

FLETCHER: Sure will. Thank you.

MARTIN: Michael Fletcher is an economics correspondent for the Washington Post. He was with us from their studios. Michael, thank you. Transcript provided by NPR, Copyright NPR.