Municipality Pensions

Municipality Pensions
Municipality pension debt is also an issue to the solvency of cities within the United States. The following two cities: Chicago, Illinois, and San Jose, California, show how much pension debts are creating a high amount of debt and parts of the budget. These increase result in loss of jobs, pay reduction of employees, and an increase in taxes to citizens to cover the increase in operating costs. To compare the two cities, we need to look at the cities and how imminent their debt crisis is. The city of Chicago's pension debt crisis is happening right now. The city of San jose, California is not as imminent. Activists, such as The honorable ex-mayor of San Jose, California, Chuck Reed who I was able to interview on this matter, are leading the way to potential reform for pension funds.

City of Chicago
The city of Chicago, according to the most recent study by Moody's Investors Service, is ranked at the top of the list for the most pension debt in the United States and it is estimated that the pension debt is 8 times the annual revenue of the city. To add to Chicago's problems, the Board of Education is ranked 14th in the nation for underfunded retirement plans.

An example of this problem is the teachers of Chicago. In addition to the regular federal, state, and local taxes that are taken out of their paychecks, they are now paying up to 10% of their salary towards the teachers pension fund. This money is not going towards their own retirement, but is actually going towards the current retirees due to the extreme case of the unfunded liabilities of the teachers pension fund. Due to the strong unions and their ideology, the defined benefits plan that current employees and current retirees that have benefits that were promised from prior Chicago administrations, there is little that can be done to reform the system. As a result, new teachers are receiving less benefits, contributing more into their own pension (plus the pension fund of current retirees), and increasing the age of eligibility for retirement. This is all in an effort to save money and decrease the gap between the assets and liabilities of the city of Chicago.

City of San Jose
Mr. Reed was the mayor from 2007 - 2015 which was just at the start of the Great Recession. At that time, the pension cost was nearly 20% of the city's budget. During his tenure, it went up to 25% because of various variables such as the Great Recession, increase in retirees, and an increase overall pension costs. To avoid increasing the funding gap, he had to cut 2,000 jobs, reduce retirement benefits for new employees, and raised taxes.

Mr. Reed pointed out the "Kick the Can" mentality which means that regarding pension debt, the current administrations are "kicking" it down the road so that the next administration will deal with it. This is because the reforms that are needed for the unfunded liabilities to decrease are met with a wall of negativity from the city employees and their unions. So to keep the unfunded liability payments more sustainable, an increase in amortization occurs. Going from 3-5 years to almost 30 years which is now the norm. Unfortunately, as can be expected, the principal is not paid down so a huge balloon payment is expected down the road which can lead to devastating consequences. Just look at the housing market in the mid-2000's.

He is proposing moving the current defined benefits plan to a defined contribution plan which has the employees taking more responsibility for their own pensions by contributing from each pay check. Also, he is recommends to increase the retirement age, raise taxes, reduce benefits to new hires, and cut jobs.

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