The True Burden of Unfunded Liabilities

The deficit of US cities’ pension funds ranges between under $1000 and $18,000 per resident, according to Morningstar.

(January 22, 2014) — The median unfunded actuarial accrued liability (UAAL) per capita reached $3,550 for the 26 most populous cities in the US, according to Morningstar.

The research found by analyzing unfunded pension liabilities on an aggregate basis could result in a better understanding of the burden on each taxpayer.

“We think the aggregate pension burden is important and individual city and state pension data should not be examined in a vacuum,” the report stated.

One significant change in Morningstar’s actuarial calculations was taking the pension liability of overlapping districts into consideration.

“By including overlapping jurisdictions, we gain a firmer grasp of the feasibility for governments to collect this amount of revenue over a period of time from residents,” said Rachel Barkley, municipal credit analyst and author of the report. The result not only saw an increased in UAAL per capita but also led to a grasp of the “true magnitude of the burden” on the residents.

Of the analyzed 26 cities, Washington DC was the strongest, with an overfunded plan with a funded ratio of 104.9%. Instead of a deficit, DC’s residents are owed $409 per capita.

On the other hand, Chicago recorded the highest aggregate per capita at $18,000, or five times the median. The city’s pension plan struggled for years with high unfunded liability of $19.4 billion, and must also deal with the Illinois state pension liability of $94.6 billion.

Morningstar reported that Chicago’s residents face multiple overlapping jurisdictions, further hiking up the UAAL per capita.

New York City follows Chicago with a similarly high unfunded liability, with its UAAL per capita at $9,482. The report stated that despite the New York state’s well-funded pension, per capita liability saw an increase in 2013.

“Although the combined unfunded liability of $9,482 per capita is still quite high, it lies well below that of Chicago primarily because of the well-funded state plan,” the report said.

Changes in actuarial assumptions also contributed to the higher numbers of UAAL per capita, the study found. Assumed interest rate decreased in 2012 from 8% to 7%, and the actuarial cost method had adjusted from a frozen initial liability to the entry age method.

“With the implementation of the new Governmental Accounting Standards Board (GASB) legislation on pensions in the coming years, only the entry age normal method will be allowed if entities wish to comply with GASB standards,” the Barkley said.

Municipal bankruptcies could also play a role in identifying aggregate pension liability, the report stated. As seen in the bankruptcies in Detroit and San Bernardino, the biggest question is whether the city’s pension benefits could be lost in the bankruptcy or if the state constitution could provide protection.

“[These] bankruptcies have potentially far-reaching implications on how pension liabilities and state protection of benefits are viewed in bankruptcy proceedings,” Barkley said.

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