Giving employees more pension flexibility and increasing efficiency in government could prevent an urban doom loop.
Giving employees more pension flexibility and increasing efficiency in government could prevent an urban doom loop.
A merica’s big cities are at risk. The work-from-home revolution has slashed city revenues by pushing residents to the suburbs and decreasing commercial-property taxes. That these workers are typically among the more well-paid only makes the impact greater. Meanwhile, the cost of pensions for retired police officers, firefighters, teachers, and other city employees continues to rise. The resulting budgetary strain will mean either higher taxes or decreased public services, unless our cities embrace a necessary alternative: pension reform.
Recent population data show that 2 million Americans have left core urban counties in the past two years. In red and blue cities alike, an “urban doom loop” looms whereby America’s cities are forced to cut public services or raise taxes, which in turn spurs even more out-migration. The market declines of 2022 and an impending economic downturn force cities to spend more on pensions while residents receive less in actual services.
We studied pensions in America’s ten biggest cities (New York, Los Angeles, Chicago, Houston, Phoenix, Philadelphia, San Antonio, San Diego, Dallas, and San Jose) and found that while the pension and “doom loop” circumstances differ by city, two recognizable patterns prevail.
One is that pension expenditures increased (in inflation-adjusted dollars) in all cities over the last decade. Pension spending in Chicago, Phoenix, and San Jose doubled or even tripled. Dallas and Houston spent half as much more in 2021 than in 2011. Meanwhile, New York, Philadelphia, San Antonio, and San Diego managed to keep pension-spending increases down by comparison.
The other is that a number of cities have reduced or held constant their employment rolls. Chicago, Houston, and Phoenix all had fewer full-time employees in 2021 than they did a decade earlier. Meanwhile, Philadelphia and Los Angeles held employment roughly constant over the same period. Only San Diego and San Antonio increased public employment, accompanying significant population increases.
Several cities trimmed their workforces, especially police departments, through attrition. Indeed, pensions have essentially defunded the police in many big cities. Los Angeles lost 600 sworn officers between 2018 and 2021 while Chicago’s police force lost 1,515 employees over the last decade. And this is occurring during a rising crime wave in many urban areas, with Los Angeles’s murder count rising by 47 percent and Chicago recording its highest murder count since the 1980s.
A city’s employee numbers signal its ability to provide ample public services. If those numbers fall or flatline — as they have — public services suffer, producing less attractive life and business conditions, especially if taxes and fees rise to ameliorate revenue falls. Increased pensions spending is doubly problematic because it is effectively paying for public services that a city has already consumed, the labor of all those retired city workers.
To forestall an urban doom loop in which residents flee, tax revenue falls, and public services crater, policy-makers must confront the pensions problem.
For city officials, this means petitioning state lawmakers because pension benefits are determined by state law, not through union-contract negotiations nor by the city council and the mayor. State governments should then change pension statutes to allow for more defined-contribution options for new hires. These are more like the 401(k) plans found in the private sector and would give employees more control over their future wealth and city governments more certainty over spending. They should also alter existing pension formulas for new hires, requiring more years before a full pension can be earned.
Such changes won’t make a big immediate impact but will slowly bend a city’s pension cost curve in the right direction. New York offers a recent example of successful reform. In 2012, then-mayor Michael Bloomberg partnered with then-governor Andrew Cuomo to secure the passage of significant pension reform, saving New York City some $7 billion since then. Unwisely, however, Mayor Bill de Blasio went on a major hiring spree, somewhat blunting the reform’s impact.
To avoid that, although it is easier said than done, cities need to do more with less. Identifying efficiency improvements — such as adopting emerging artificial-intelligence technologies that automate the routine tasks of municipal-government administration — will allow cities to save on human capital without hurting public services.
Ultimately, pension reform would help current city workers by decreasing layoff risks and serve the public by maintaining public services. Human capital — including city workers and the general public — has played a key role in the urban flourishing of the past two decades, and the future of America’s cities depends on preserving it. Pension reform can help.
Daniel DiSalvo is a senior fellow at the Manhattan Institute and a professor of political science at the City College of New York — CUNY. Jordan McGillis is a Paulson Policy Analyst at the Manhattan Institute.