In municipal finance, balancing long-term obligations (like pensions and retiree healthcare) with the maintenance of tangible assets (like roads, water lines, and public buildings) is critical to a city’s overall fiscal health. On one side of the ledger, ballooning retirement costs can quickly crowd out other budget priorities if underfunded. On the other, deferring upkeep on infrastructure can lead to spiraling expenses when it finally comes time to repair or replace. Thoughtful management of both sides creates a resilient foundation that supports essential city services and bolsters community trust.
For most local governments, employee retirement plans and retiree healthcare (often referred to as OPEB—Other Post-Employment Benefits) are some of the largest and most complex liabilities. Responsible stewardship ensures city employees receive promised benefits without jeopardizing the fiscal stability of the municipality.
Actuarial Assumptions
Assumptions about investment returns, mortality, and discount rates profoundly affect a plan’s funding status. A small change in the assumed rate of return, for instance, can shift unfunded liabilities by millions. Periodically benchmark your assumptions against industry standards and adjust them if market or demographic trends warrant.
Avoiding Underfunding
Political temptation often leads cities to reduce or skip contributions in tough times. But underfunding exacerbates the liability exponentially, eventually siphoning resources away from public safety, community services, and infrastructure. Commit to a rigorous funding policy, even if it requires tough decisions in the near term.
Cities can consider updates to retirement benefit structures—especially for new hires—without drastically undermining long-standing promises:
Infrastructure—roads, bridges, water/sewer lines, public buildings—forms the backbone of municipal services. Deteriorating or outdated infrastructure can hinder economic growth, increase liability risks, and erode public confidence.
Condition Assessments
Systematic reviews of infrastructure health (e.g., pavement quality indices, frequency of water main breaks) highlight emerging issues before they become disruptive and expensive. Inventory everything from sidewalks to storm drains, grading each asset’s condition. Even basic rating scales help leaders prioritize repairs and allocate funds more effectively.
Life-Cycle Costing
Deferring maintenance sometimes seems like a harmless way to save money in the short run. But postponing critical repairs often leads to a future spike in costs when total replacement becomes necessary. Incorporate multi-year projections of upkeep expenses, and weigh the full life-cycle costs of new construction to ensure sustainable funding.
In practice, pensions and OPEB obligations compete with road resurfacing, facility upgrades, and water main replacements. A municipality that struggles with escalating retirement costs will find less available funding for physical infrastructure—and vice versa. Aligning the two spheres calls for careful forecasting, consistent contributions, and a commitment to prudent financial planning.
Forecast Both Sides Simultaneously
Integrate pension and OPEB projections alongside long-range capital improvement plans. Seeing liabilities and potential infrastructure needs in one unified forecast highlights trade-offs early.
Prioritize Risks
Rank projects and liabilities by urgency, impact on public safety, cost inflation, and overall community benefit. This helps ensure the most critical tasks get addressed first.
Establish Dedicated Funding Streams
Consider setting aside a portion of revenue growth or targeted tax increments for pension/OPEB obligations, while earmarking other dedicated fees for infrastructure renewal. Consistency in funding reduces the risk of future shortfalls.
Monitor Performance & Adjust
Track investment returns, demographic changes, and the evolving condition of core assets. If markets shift or population grows quickly, respond by recalibrating assumptions and schedules.
If pension or OPEB costs mushroom out of control, cuts often fall on city programs serving those who can least absorb them. Meanwhile, neglected infrastructure can impose higher “hidden taxes” on low-income neighborhoods, which may be disproportionately affected by unreliable transit, water shutoffs, or unsafe roads. Striking the right balance fortifies the entire community’s well-being.
Asset and liability balancing is a cornerstone of responsible municipal management. By maintaining robust pension/OPEB funds and systematically caring for roads, buildings, and other critical assets, cities can deliver stable services and foster long-term resilience. Good forecasting, strong funding policies, and active oversight are indispensable tools in this process. Ultimately, finding equilibrium between the obligations owed to city employees and retirees and the civic infrastructure entrusted to today’s residents lays the groundwork for a healthy, well-served community for decades to come.