Editor's note: POLITICO Magazine “asked mayors, urbanists and other thinkers to name the biggest threats that American cities currently face, and most took the long view—looking beyond Trump to challenges like urban broadband deserts, a shallow mayoral talent pool, crippling pension crises, and state or federal meddling.”
The pension bomb
The state and local pension problem received significant attention in the years after the 2008 market meltdown, but reform efforts in most places have done little to alleviate the issue since. That’s especially true for municipalities because compensation represents a far greater share of their budgets than it does for states. Most alarmingly, the long bull market (the second longest in U.S. history by some measures) has not significantly bolstered most municipal funds.
Even advocates for pension systems now admit that their financial model has major problems that they didn’t anticipate. It is not merely that these systems are overly optimistic, for instance about projected investment returns. Rather, the complex accounting does not fully account for the volatility we see in the economy and financial markets. The result is, as the New York Times wrote in 2015, in one of the few stories to address this new “heresy”: “It is possible to hit your long-term actuarial target and still go insolvent.” The Rockefeller Institute of Government has addressed this in a series of remarkable studies showing that an underfunded pension system that receives all of its contributions from government and hits all of its projected investment targets still has a 1-in-6 chance of falling to such a low funding level that recovery becomes impossible. The chances that these funds, even if they are fixable, will need significant additional contributions out of local budgets, taxing residents and crippling services is even higher.
Neither politicians, voters nor most of the press fully understands this yet....
Steven Malanga is the George M. Yeager Fellow at the Manhattan Institute and a senior editor at City Journal.