Pension plans run by the nation’s 15
largest cities face a familiar litany of woes, according to a new report from
S&P Global Ratings.
Cities such as New York, Los Angeles and
Houston are battling a combination of weak investment returns, less-than-robust
employer contributions and longer lifespans for beneficiaries.
municipal pension plans experienced the market downturn in 2008-2009 and have
not been able to recover to funded levels seen in the early 2000s,” S&P
Global Ratings’ report says. “Weak market returns in 2015 and 2016 have not
made that recovery any easier. In addition, many plans are lowering assumed
long-term rates of return in light of weak market performance, which
contributes to declining funded ratios.”
of city pension funds varies widely. The typical plan is 70% funded, but
Chicago’s pension is just 23% funded. Indianapolis has the best-positioned plan
at 98% funded, S&P Global Ratings says.
liability as measured by the plans’ potential cost to taxpayers follows a
similar trend. Chicago’s plan imposes the biggest burden by far, at $12,427 per
Chicagoan. Indianapolis’ pension liability is just $66 per person.
made barely half of its legally required pension contribution in 2015. Given
the precarious numbers underlying Chicago’s pension plan, it’s no surprise that it
has the lowest rating among the 15 cities, at BBB+. Three big-city pension
plans–Austin, Columbus and San Antonio-–were rated AAA.
most plans are reducing their assumptions about rates of return. The median
assumed rate is 7.5%, and 12 of the nation’s 15 biggest cities have
reduced their return assumptions since 2014.
returns are creating budget squeezes for many cities.
pension funded ratios continue to decline whether through underfunding, benefit
structures, changes in assumptions or poor market returns, the effect will be
increased annual costs for most cities,” the study says.
cities are tackling their pension woes by cutting benefits for new employees,
boosting employee contributions, or shifting new workers to defined
contribution plans. Because these moves affect only new employees, it might be
decades before cities see any savings from pension reform.
big cities, pensions benefit police and firefighters, workers with the
political clout to fend off reductions in benefits. In Chicago, the state
constitution prevents the city from changing the benefits it promised
general, it’s difficult for cities to reform current benefits,” said Sussan
Corson, credit analyst at S&P Global Ratings and lead author of the study.
faces a particularly dire pension picture, and the political, economic and
legal realities vary from city to city. But, Corson said, the overall pressures
squeezing city pension funds are no different from those stressing retirement
plans run by states and the private sector.
cities included in the survey are Dallas, Jacksonville, Philadelphia, Phoenix, San
Diego, San Francisco and San Jose. The S&P Global Ratings’ survey did not look
at asset allocations.