Major cities around the United States are increasingly finding their yearly budgets are shrinking on spending in regards to needs, because debt and pension spending is growing. This is not a shock of course. Any rational minded taxpayer or economist knew the debt and pension promises were unsustainable.
Merritt Research Services provided Governing with data on current debt service, pension costs and other post-employment benefit (OPEB) expenses for cities with populations exceeding 500,000. These three cost drivers collectively averaged nearly a quarter of total governmental fund expenditures in recent years. What’s worrisome is that legacy costs are rising, taking up ever-larger shares of budgets. For the large cities reviewed, the three line items accounted for a median of 22.4 percent of fiscal 2016 governmental fund spending, up from 19.8 percent in fiscal 2011. In some big cities, the increase has been much greater. Consider Jacksonville, Fla. Debt, pensions and OPEB made up less than 20 percent of expenditures there in 2008. Since then they have climbed to about 32 percent in recent budgets.
As legacy costs continue to rise, cities have less money for public safety, health care and other essential services. “The trend continues to squeeze out other operating expenses over time,” says Richard Ciccarone, president of Merritt Research. “Many cities are going to have to increase taxes to retain current levels of services.”
The largest legacy line item for many localities is debt. Older cities with outmoded infrastructure typically have to borrow more than newer cities, especially if they operate transit systems or public utilities. But newer cities that need to accommodate growth are also finding that their borrowing costs can rise quickly.
Pension payments figure prominently along with debt in siphoning funds from routine government operations. Pension and OPEB contributions accounted for roughly a quarter of Los Angeles’ expenditures in recent years, while they’re less than 10 percent in about a dozen other large cities. But a low number for pension costs isn’t always a sign of civic health: Some governments shortchange pension contributions to stave off cuts in other areas when times are bad.