Great Disparity in Funding Among City Pension Plans

November 12, 2013 ( – Washington, D.C. has the strongest-funded city pension plan and Chicago has the weakest one, according to a new report.

“The State of City Pension Plans 2013: A Deep Dive into Shortfalls and Surpluses” was released by Morningstar, Inc., a provider of investment research. Pension plans and liabilities for the 25 most populous U.S. cities are analyzed by Morningstar’s municipal credit analysts. The report shows great disparity in funding among the 25 most populous U.S. cities, though U.S. states are slightly better funded than cities on a median basis.

“We 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,” says Rachel Barkley, municipal credit analyst for Morningstar, based in Chicago. “While municipal bankruptcies are rare, the recent cases of Stockton and San Bernardino in California, along with the city of Detroit, may have significant impact on the national level as we see how the federal bankruptcy court will view state constitutional protections of retirement benefits.”

The report also reveals:

  • The 25 most populous U.S. cities have more than $125 billion of unfunded pension liabilities;
  • Twenty-two of the largest cities have the majority of their pension liabilities tied to a pension plan where the city is the major participant, which means the pension liability will have to be funded either solely or mainly by the city;
  • Approximately half of the cities evaluated contribute the full Annual Required Contribution (ARC), or the required dollar amount a city would need to pay to fund employee benefits earned in the last fiscal year;
  • San Jose, California’s 2012 pension contribution was 29.7% of general fund spending, the highest among the largest 25 cities;
  • Memphis, Tennessee, made the smallest pension contribution in 2012 at 3.1% of general fund spending;
  • Three cities have a funded ratio (plan assets divided by liabilities) of more than 90%. They are Detroit, Michigan, San Antonio, Texas, and Washington, D.C.;
  • Washington D.C. is the strongest among the cities reviewed in the report, with funding for its pension plans greater than 100%;
  • Seven of the evaluated cities fall below Morningstar’s fiscally sound threshold of a 70% funded ratio; and
  • Chicago is the weakest-funded city pension system with a funded ratio of 35.2%.

The report also includes analyst commentary about annual budgetary pressures, pension reform, the effects of municipal bankruptcies and red flags. Morningstar analysts also compiled a number of key metrics and data for the pension plans of the 25 most populous U.S. cities, including actuarial assets, actuarial accrued liability, funded ratios, unfunded actuarial accrued liability (UAAL) per capita, annual city contributions, annual pension contributions as a percentage of spending, and net outstanding debt.

An excerpt of the report can be found here. An article and video highlighting the report findings can be found here.