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.
“Most 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.”
The health 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.
Pension 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.
Chicago 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.
Meanwhile, 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.
Lower returns are creating budget squeezes for many cities.
“As 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.
Many 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.
In many 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 employees.
“In 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.
Chicago 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.
Other 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.
By Jeff Ostrowski