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Cities chart course through pension morass

Wednesday - 1/2/2013, 5:20pm  ET

By DAVID KLEPPER
Associated Press

PROVIDENCE, R.I. (AP) - In Philadelphia, pension costs doubled in a single decade. Cities in Rhode Island dimmed streetlights, raised taxes and put off road repairs. Stockton, Calif., fell into bankruptcy.

Unpaid bills from decades of retirement promises made to public workers, combined with a lackluster economy and steep Wall Street losses, have built up a financial mountain that threatens to overwhelm budgets and operations in cities and counties across the country.

While it hasn't gotten the attention of the "fiscal cliff" in Washington, the pension crisis at City Hall could have similar effects as mayors are forced to raise taxes, cut government services or renege on retirement promises made to police officers, firefighters, teachers and other public workers.

"It's not about assigning blame, because look, these numbers are staring us in the face," said Allan Fung, the mayor of Cranston, R.I., where the pension fund is only 16 percent funded and the city needs $270 million to meet its pension obligations. "It's a dire situation for us and for many cities and towns around the country. It's a recipe for disaster at the worst economic time possible."

Collectively, American municipalities face nearly $600 billion in unfunded pension obligations. The problem arose in many cities because local leaders for decades failed to properly fund retirement systems. Longer-living retirees and rising health care costs drove costs higher.

Then came the economic downturn, in which investment losses decimated even relatively well-off pension funds. San Diego's unfunded pension liability surged from $1.3 billion in 2008 to $2.11 billion in 2009.

In Philadelphia, the city's annual pension costs are now calculated to be well over $500 million _ up from $200 million a decade ago. The city's total annual budget is $3.5 billion and it faces a gap of $4.5 billion between what is promised to workers and what is set aside to pay for those benefits.

Unions argue workers aren't to blame for poor investments or past failures to fund pension systems. Anthony Martin, a Chicago fire lieutenant and trustee of his public pension fund, said he has seen records going back to 1877 showing the retirement system was underfunded even then.

"You have a dysfunction in government that is hard to overcome," Martin said. "Year after year they kicked the can down the road."

There's some evidence that may be changing, however, as mayors find they can no longer ignore mounting pension bills. Providence Mayor Angel Taveras successfully negotiated concessions with unions and retirees to shave $178 million off the city's future pension obligations. The city had faced $903 million in future pension costs, which Taveras had said could force the city into bankruptcy.

"Through collaboration, we have pulled Rhode Island's capital city back from the brink of bankruptcy while sparing taxpayers the unnecessary expense of a long, costly legal challenge that threatened our future," he said after the police union voted to accept the agreement, which will suspend pension increases and eliminate the practice of giving some workers compounded 5 or 6 percent pension increases annually.

The negotiated settlement is among the first of its kind in the country, and could foreshadow similar deals in other cities.

States around the country face even more expensive problems in their own retirement systems _ $1.4 trillion at last estimate. But mayors face a pension puzzle that can be even more challenging. State retirement benefits are often set through statute, but local pensions are typically negotiated through collective bargaining, making them much harder to break unilaterally.

Rhode Island had one of the nation's worst pension problems before lawmakers passed a sweeping overhaul in 2011 that suspended pension increases, raised retirement ages and created a new benefit that merged traditional pensions with 401(k) plans. The moves _ now being challenged in court _ will save an estimated $4 billion in coming decades.

The changes affect teachers, state workers and municipal employees and retirees who participate in the state's pension system. Despite pleas from mayors and Gov. Lincoln Chafee, municipal pension plans were left out of the overhaul. Top lawmakers said it was up to mayors to negotiate pension concessions.

In Illinois, state law sets retirement benefits for all public employees, including city workers and Chicago Public Schools teachers. That means Chicago Mayor Rahm Emanuel must head to the Capitol in Springfield to lobby for any changes. In May, he told lawmakers that if they didn't pass reforms he would be forced to choose between letting the funds go bankrupt or increasing property taxes by 150 percent.

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