(Bloomberg) -- The bankruptcy of Detroit, which may cut retirement benefits of 30,000 current and former city workers, is causing investors to scrutinize billion-dollar shortfalls in government pensions in other parts of the country.
Estimates of public-pension shortfalls vary based on assumptions about investment earnings. The Center for Retirement Research in Newton, Mass., estimates the collective deficit of state and local pensions is from $1 trillion to more than $3 trillion, depending on investment-return assumptions.
In the first quarter of this year, the largest 100 state and local retirement funds held $2.9 trillion in assets, about the same amount as in 2007, according to the U.S. Census Bureau. To make up for years when assets didn’t increase as governments assumed they would, pensions will have to either invest more, obtain better returns or cut benefits to close the gap.
In 2011, local governments put $57 billion into retirement funds, a small share of their $1.2 trillion budgets, according to Census Bureau and U.S. Commerce Department figures.
“Pensions are troubled, but not hugely out of line,” says Dean Baker, an economist with the Center for Economic and Policy Research in Washington. “If you put it off long enough, they will face serious strains trying to meet those burdens.”
Chicago had just 40% of what it needed to meet future pension payments as of 2011, according to data compiled by Bloomberg. Mayor Rahm Emanuel, a Democrat, can’t curb benefits without approval from the state legislature, which hasn’t acted. The city’s pension contribution will rise from $467 million in 2014 to $1.2 billion in 2015, Moody’s said, calling the increase a “tremendous strain” on the budget.
Kathleen Strand, a spokeswoman for Emanuel, didn’t immediately respond to a telephone call seeking comment.
Other cities have been more successful in pushing through changes. Voters in San Diego, where mayoral candidates in 2005 debated seeking bankruptcy protection to escape pension debts, last year approved a ballot measure steering new public employees into 401(k)-style retirement plans. They are based on a worker’s contributions instead of salary and years of service.
New York Mayor Michael Bloomberg has pushed for changes to state laws governing public pensions that would let the city reduce its costs. The amount the nation’s largest city contributes each year is set by an independent actuary.
“Every year, we pay our full bill,” says Marc LaVorgna, a spokesman for the mayor, who is founder and majority owner of Bloomberg News parent Bloomberg LP.
To shore up its pensions, Philadelphia, the fifth-largest U.S. city, has altered benefits for new municipal employees, says Mark McDonald, a spokesman for Mayor Michael Nutter. It may dedicate part of its sales-tax revenue to pensions.
Phoenix approved changes requiring new workers to contribute more toward their retirement and letting the city contribute additional revenue to the pension system. “It will put us in a significantly better position,” says Mayor Greg Stanton. “Phoenix is not Detroit.”
In Jacksonville, Mayor Alvin Brown is pushing a plan to boost employee pension contributions and pare benefits for new city workers, says David DeCamp, a spokesman for the mayor.
In April, Providence capped cost-of-living adjustments for retirees, shaving $170 million from its pension deficit. The Rhode Island capital is among those cities with the least set aside for pensions and has less than a third of its projected need, according to the Retirement Research center.
In New Haven, Conn., where the pensions are underfunded by about half, budget director Joe Clerkin says the city negotiated benefit cuts and increased contributions from some workers. He says municipal leaders have had a “great sense of urgency” in recent years to try to curb pension liabilities.
“I don’t think the Detroit situation per se stokes that,” Clerkin says. “I think it’s a terrible story, but in terms of our case, we’ve been working really hard to avoid that situation.”
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