On November 12, 2013, Morningstar, Inc. released its report: The State of City Pension Plans 2013: A Deep Dive Into Shortfalls and Surpluses. The report analyzes city pension plan funding for the 25 most populous U.S. cities. In the study, Morningstar uses two measures related to fiscal solvency and the management of city pension plans: 1) the funded ratio; and 2) the unfunded actuarial accrued liability (UAAL) per capita (which represents the amount each city resident would need to pay to fully fund the state’s city’s unfunded liability). The data were compiled mainly from the most recent actuarial reports or comprehensive annual financial reports.
The 25 cities included in the analysis have more than $125 billion of unfunded pension liabilities. Among them, 22 have pension liabilities that will have to be funded either solely or mainly by the city. Morningstar reported that about 50% of the cities contributed the full annual required contribution (ARC) to fund employee benefits earned in the last fiscal year. In aggregate, the cities’ pension plans are 66.4% funded with an average unfunded liability of $3,776 per capita, although these varied widely among the cities. The study also reports that the median funded ratio is markedly better at 76.0%, with an average unfunded liability of $1,556 per capita. For comparison, Morningstar recently published a companion report, State of the State Pension Plans 2013, which found that state pension plans have an aggregate funding ratio of 72.6%, with a UAAL per capita of about $2,600.
With regard to the distribution of the cities’ funded ratios, 3 cities have funded ratios of 90% or more and 8 have UAALs of less than $1,000 per capita. In addition, 7 cities have funded ratios of at least 80%. Morningstar considers pension systems with an unfunded ratio of 80% or greater and/or a UAAL per capita under $1,500 to be in good condition. However, 7 of the evaluated cities have funded ratios below 70%.
According to the study’s author, Municipal Credit Analyst Rachel Barkley, the report focused on the 25 most populous cities because they are “major financial centers and play an important role in the overall economy and the larger municipal bond market.” In addition, the “nation’s largest cities often maintain their own pension plans, separate from those administered by the states. Therefore, in order to bring further clarity to the pension burden facing these entities, we have analyzed the pension plans and liabilities for the 25 most populous U.S. cities.”
The report concludes: “The main driver of long-term pension health for each city will, in our opinion, be driven by its management practices. Entities that fully fund the ARC, actively seek to manage pension liabilities, and periodically review their actuarial assumptions and investment policies are likely to maintain adequate pension funded levels in the long run. Governments’ treatment of pension funding and benefits in times of positive market returns and overall economic growth will also be a key indicator of whether plans will experience significant stress in future recessions.”
Individual data for each plan are also included in the report. Although this is the first report prepared by Morningstar on city pension plan funding, it expects to provide an annual updated report to inform investors about the fiscal health of each city’s pension liabilities and the potential impact on the city’s overall credit quality.
The report is available at: http://www.nasra.org/Files/Topical%20Reports/Credit%20Effects/Morningstarcities1311.pdf