Gateway Cities Journal: Free Gateway Cities from the heavy burden of legacy pension costs

A study released by the MassINC Policy Center last week shows how unfunded municipal pension obligations keep many Gateway Cities from achieving their full potential as regional economic hubs. The weighty and longstanding pension problem dates back more than a century, but it has never gotten the attention it deserves. When the issue surfaces, it is usually critics who unfairly target municipal workers or accuse Gateway City leaders of poor fiscal management. The truth is this problem is almost entirely the creation of the state.  

When municipalities established pension funds more than a century ago, state law prevented them from setting aside funds to cover future obligations. This did not change until 1977, and local pension funds were not allowed to invest their assets until 1987. Massachusetts taxpayers have been paying for this costly mistake for the past four decades, but Gateway Cities were left on the hook for especially large sums. Since just 2010, Gateway City residents have spent more than $5 billion covering legacy pension costs that were assumed well before most were born or took up residence in their community.  

While it was the state that created this burden, it is not shared evenly by Massachusetts residents. Cities that lost population and jobs to suburbanization and deindustrialization feel much more pain because they are now forced to spread legacy municipal pension costs over a smaller tax base. Proposition 2½ further constrained the ability of communities with shrinking taxbases to address unfunded municipal pension liabilities, widening large geographic disparities. 

Springfield is a good example. The city spends nearly $60 million each year on pension costs—enough money to double the size of the police force and still have funds left over. While this fiscal strain doesn’t capture media attention, it is more of an “urban doom loop” than COVID-19 ever presented. Cities forced to carry these obligations for decades can’t make the kinds of investments that will draw residents and business. Their taxbase contract further, and the problem becomes even more of a drag. 

With headwinds gathering, now is the time to do something. Gateway City real estate markets are historically more volatile, and sharp declines in property values can push the Proposition 2 1/2 levy limit over the levy ceiling, forcing cities to reduce tax collections. In Springfield, this occurred in FY 2012 and FY 2013, and also over a five-year span beginning in FY 1991. The problem was so severe that the Massachusetts Department of Revenue recommended special legislation to allow Springfield to recapture its lost levy capacity.