S&P: Pension Funding Levels Dip for 20 Largest Cities

August 14, 2006 (PLANSPONSOR.com) - Some US cities are not faring well when it comes to funding their employees' pensions, with the average pension funding level in the 20 largest US cities falling from 99.8% to 84% in five years, according to a recent Standard & Poor's survey on pension debt statistics.

“The degree to which this trend will continue depends on a number of unpredictable variables, including investment performance, actuarial assumption changes and potential increases in longevity,” Parry Young, Standard & Poor’s credit analyst, said in a release. “Unfortunately, cities have varying degrees of control over these factors.”

The cities with the greatest funding shortfalls were Philadelphia, whose plan assets are only 53% of its long-term liabilities; followed by Boston, with 63% funding; Chicago, whose plan was 65% funded; and El Paso, with a funding level of 74%.

Some cities came out above the fully-funded mark, with Milwaukee at 117%; San Francisco at 104%; and New York City and Detroit with just under 100%.

However, Parry goes on to say that these statistics may be premature, because fiscal 2006 pension investment returns are not in yet and full actuarial valuations are still months away. He predicts fund managers will have a hard time meeting the long-term investment rate of return required to bring funds back into balance.


The report attributes the dip in overall pension funding to several factors.

On the asset side, poor investment performance seriously depressed equity prices, while on the liability side demographic changes, such as greater longevity, and benefit enhancements served to boost liabilities, according to the release. With 40% to 50% of assets in domestic equities, funds were pummeled by record declines in the S&P 500 index of 16% and 19% in fiscal years 2001 and 2002, respectively.