Better management may not be enough to stabilize pension funding in Connecticut’s major cities, according to the Manhattan Institute for Policy Research.
"Dramatic retirement benefit reform" -- such as phasing out defined-benefit pension plans -- may be more urgent for Hartford, New Haven, Bridgeport, Stamford and Waterbury than for state pension funds, senior fellow Stephen Eide said in a report for the right-leaning think tank.
“With the exception of Stamford, they all have weak economies and elevated rates of poverty,” Eide said. “A weak local economy raises questions about the affordability of defined-benefit programs.”
Hartford, New Haven, Stamford and Waterbury operate their own independent pension systems. While Bridgeport participates in a statewide system, the city is responsible for meeting its own pension obligations. All of these cities also offer retiree health-benefit programs run locally.
“While the state’s record of pension mismanagement is well documented, cities have been guilty of mismanagement as well,” said Eide. “However, for the state’s five biggest cities, the question of affordability is more important than mismanagement.”
Property tax revenue hasn’t kept up with the need for more pension funding in New Haven, Hartford, and Stamford, according to Eide. Hartford’s property tax revenues, for example, rose by $2.7 million to fiscal 2017 from fiscal 2008 in real terms, while its pension costs spiked by $16.7 million.
While annual costs for retiree health care have not risen as dramatically, they are still high, totaling $132 million for all five cities, Eide said. “This is a questionable expenditure, since the private sector has largely phased out health-care benefits for retired workers.”
Connecticut’s well-chronicled budget imbalance and legacy cost problems, which have incurred the wrath of bond-rating agencies, have effectively masked urban problems within the state, according to Eide.
“Public pensions in Connecticut are unusually decentralized,” he said. Of its 212 public pension plans — the sixth-highest total of any U.S. state —206 are local plans.
Capital city Hartford, which has flirted with bankruptcy the past two years, is under a bailout deal with the state, known formally as a contract-assistance agreement. Under the arrangement, the state is providing financial assistance in exchange for stricter oversight through the new Municipal Accountability Review Board.
Under that board, Hartford is designated as a Tier III community. Tier IV is the most deeply distressed.
“Rising pension payments have contributed especially to Hartford’s fiscal distress,” said Eide.
“When combined with its annual [other post-employment benefits] bill—about $14 million last year—Hartford’s spending on the promises of the past total about the cost of the $40 million state-financed ‘bailout’ that it claimed it needed to avoid bankruptcy last year,” said Eide.
“Without a retirement benefit burden, Hartford would still likely be a distressed city and certainly a poor one, but it might not be a city on the verge of insolvency.”
At state and local levels both in Connecticut and nationally, rising pension costs have crowded out funds available for infrastructure, the social safety net and other public services.
"State and local governments should always strive for the permanent fix as opposed to the Band-Aid,” said James Spiotto, a managing director at Chapman Strategic Advisors LLC in Chicago.
"Over 40 to 50 years, what has happened to our cities? We have not created urban areas. Cities are funding cultural, business and economic centers of the regions but they have less ability to do the funding.
"With legacy cities, as you see in the report, poverty is going up, not down. Taxes are going up. Revenue is going up to some degree, but you're never ahead of the game, you're falling behind."
According to Spiotto, the effects of a digital economy and artificial intelligence -- including the decline of retail and the increasing use of robots and automatic cars -- could deprive cities of tax revenue.
"You see all sorts of challenges to parking fees, gas fees, vehicle fees. The answer is in how do we do better with economic development."
One solution, said Spiotto, is to create regional governments.