Gauging the Burden of Public Pensions on Cities

Stories in the popular press suggest – particularly in the wake of the bankruptcy of Detroit – that pensions are the major expense of American cities and will lead to their widespread collapse.Thus, it is important to know the burden of pensions on cities.

This burden can be measured in two ways. The first is the direct cost of pensions to city governments. These costs include contributions to locally-administered plans, contributions to state non-teacher plans, and contributions to state teacher plans on behalf of dependent school districts. The direct cost measures the pressure on the city’s finances. But there is also a broader question: how much do residents of a city pay for pensions? Here one would add to the city’s direct costs the contributions made by independent school districts that serve city residents and contributions that city residents make to county plans. This second concept – which is more comprehensive, avoids distortions created by local government arrangements, and provides a measure of residents’ incentive to move – is the focus of this brief. The question is whether pension costs – measured comprehensively – account for 5 percent or 50 percent of total local revenue raised from city taxpayers. (The Appendix presents both measures of the pension burden.)