Pension Pressure: Impact of Public Pension Funds on Cities

Link to full R&R at Journal of Urban Economics

Most U.S. cities have defined-benefit pensions for their public workers, creating an obligation that exposes sponsoring cities to shortfall risk. Large funding gaps in recent years have required increased pension payments and generated fiscal stress for cities. To analyze the effect of this “pension pressure”, I assemble a novel dataset which captures the universe of cities and their pensions in California from 2003 to 2019. I focus on the changes in city unfunded liability contributions. These mandatory, externally determined payments are plausibly exogenous to cities’ year-to-year spending needs. Using a first differences empirical specification, I find that cities reduce non-current expenses, payrolls, and employment, with police employment declines specifically. Further, there are accompanying increases in crime rates and costs. These estimates imply that pension pressure impairs local public service provision, with contributions displacing other spending.