Promises Made, Promises Kept? The Fiscal Burden of Pensions and Health Care in Legacy Cities.

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As policy analysts and pundits unpack President Obama’s Thursday address on jobs and the economy, Eric Scorsone of Michigan State University reminds us in Community Progress’ latest blog entry that the fiscal health of our cities is a core driver of the larger economic health of their regions. He argues that comprehensive strategies to address cities’ fiscal responsibilities for programs like pension and employee health care costs must be part of the effort to secure regional economic health over the long term. Feel free to share your experience by sending your “blog” piece to us.

Legacy cities, those cities that have lost substantial population and business but remain important in the American landscape, continue to capture the imagination of policy makers, artists, entrepreneurs and the media.  The future of such cities is not uniform and depends on a mix of history, culture, local economic conditions and just plain old luck. Some commentators claim that these cities are on the vanguard of the great municipal fiscal crisis hitting the country; others more optimistically claim they are the new “it” place for young people and will soon turn the corner.

I would propose that both are right — that the future of many local economies in legacy cities may actually be turning the corner from the despair of the last thirty years.  However (there is always a however), the fiscal future of such cities may be less certain. Witness, Pittsburgh, PA; where economic health has not translated into fiscal health.  Pittsburgh is a cautionary tale of the legacy costs (retiree pensions and health care promises) burdening a city government and threatening that city’s economic health.  City governments have made big promises to people that will be hard to keep.

I would make the case that fiscal and economic health do not go hand in hand.  No legacy city can fully recover economically as long as its city government remains mired in burdensome legacy costs that retard fiscal health.  The private sector cannot and will not fully replace government; city services still matter.   Shrinking a city will likely reduce some costs such as infrastructure maintenance and allow a city to reallocate resources from weak market areas to strong market areas.  The fact remains that this in and of itself won’t necessarily fix the legacy cost problem.

Some of these shrinking city savings might go into the legacy cost pot, but will it be enough? These legacy costs aren’t unique to legacy cities but they represent a much bigger problem to such places. It is time to recognize that it will take a number of tools to fix the problem. Our research suggests that for many Midwest cities, the future is one where legacy costs consume the entire city budget.  Already, some small industrial cities have become pension funds rather than providers of services.  No amount of land use restructuring can fix that problem.  Restructuring long term obligations, radically shifting workforce policies and aggressively seeking out private partners will all be part of the mix. These changes are going to take the will of our state legislatures to make some significant policy shifts. But the benefits of the changes are real and will allow fiscal health to be restored.

Fiscal health can be the solid foundation that serves as partner rather than barrier to economic health. It is time to combine a policy of reallocation of public services within city boundaries, and the resulting operational cost savings, with a policy to address legacy costs – a policy that will be the new building block of economic and fiscal health for legacy cities.

Dr. Eric Scorsone, Michigan State University