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City Finances Recovering, But Pensions Still Holding Them Back


After years of recession-generated lower municipal tax bases, wounded local economies, and decimated city finances, the vast majority of cities now report that they are better equipped to meet their fiscal needs than they were a year ago, according to a new report by the National League of Cities. Tax revenues are up and city coffers have recovered to the point where many cities can now afford to put money aside in rainy day funds to help them weather the next storm—something few have done since the beginning of the recession. All in all, very good news.

There is one dark cloud on the horizon, however, and it’s a big one: More than three quarters of the cities cited both health benefits and pensions as key problems having the largest negative impact on their financial pictures. Worse, many cities report that they have responded to this fiscal pressure by increasing the fees they charge for basic public services, while some have increased property taxes. As the report notes, the tax hikes are a relatively rare step for cities to take, suggesting that they are feeling significant pressure.

This points to a key sticking point in the pension crisis. When pension cost creep doesn’t threaten basic city services, it doesn’t usually get the broader public’s attention. But when voters begin to see that they are paying for public employee pensions and benefits with cuts to services they rely on, attitudes will quickly change. Given that these pension systems are likely to become even more strained as the baby boomers retire and cities cut back on municipal employees, this problem isn’t going to disappear when the recession recedes from memory.

[Garbage truck photo courtesy of Shutterstock]

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