CHICAGO – Chicago is a standout as the worst among its big city peers in key pension system measurements, according to a new S&P Global Ratings report.
Data in the report "Pension Pressures Will Weigh On 15 Largest U.S. Cities' Budgets" underscores the severity of Chicago's pension funding woes and the strain on its budget and tax base.
Overall, the report found common trends of high fixed costs for pension, other post-employment benefits, and debt service.
"We believe these trends could be a source of future budgetary pressure," the report said.
For, Chicago, the pressure is acute because it tops the charts among key negative metrics. The median weighted funded pension ratio aggregated across the 15 cities' plans totaled 70%. Chicago is an outlier at only 23% funded. Indianapolis enjoyed best funded ratio at 98%.
"Given weak market returns in 2016, we believe funded ratios reported in fiscal 2016 are likely to look worse for most cities," S&P wrote.
Pension funding is crowding out spending elsewhere for many of the cities, most notably in Chicago, Jacksonville, and San Jose where carrying charges for pension, other post-employment benefits and debt service exceed 30%. In that category, Chicago is tops at more than 35%.
As of fiscal 2015, the 15 cities had a median net pension liability per capita of $2,361, compared to a median debt per capita of $1,675. Several cities had higher debt per capita ratios, but Chicago topped all in pension liabilities per capita and had the highest combined level of more than $16,000 with New York City following at more than $15,000.
"As cities pay more for deferred compensation than capital projects, challenges will continue to arise as governments consider how best to deliver services to residents and keep up with their capital needs," S&P wrote.
Chicago far exceeds any other cities in falling short of making an actuarially required contribution. In fiscal 2015, Chicago funded only 52% of the ARC.
Chicago has adopted new funding schemes for its four pension funds that phase in an ARC payment over five years to bring its funds to a 90% funded ratio in the coming decades. Final state approval is needed to complete the transition for two of the city's funds.
The funding fixes prompted S&P last October to revise its outlook on Chicago's general obligation BBB-plus rating to stable from negative. The city's pension strains in 2015 prompted Moody's Investors Service to drop the city to junk, where it remains.
The report also noted that the lowest funded ratio in fiscal 2015 across the largest individual plans was Chicago's Policemen's Annuity and Benefit Fund at 25%, down from 26% in fiscal 2014.
The report found median net pension liabilities per capita exceed median debt per capital for the largest cities; most of the cities reviewed have high fixed pension, other post-employment benefits, and debt service costs that exceed 20% of expenditures. Funded ratios for the largest plans declined from 2014 and 2015, and median weighted funded pension ratio aggregated across plans totaled 70%.
"Despite increasing costs, many of these largest cities benefit from relatively deep and diverse economic bases," said analyst Sussan Corson. "Furthermore, some cities are experiencing revenue growth or have the capacity to raise revenue. This revenue flexibility helps to offset the impact of higher pension liabilities."
The 15 cities profiled are New York, Los Angeles, Chicago, Houston, Philadelphia, Phoenix, San Antonio, San Diego, Dallas, San Jose, Austin, Jacksonville, Indianapolis, San Francisco, and Columbus.
Over the last year, S&P has downgraded or assigned negative outlooks to Dallas, Houston, and Philadelphia to reflect near-term budgetary pressures and reduced financial flexibility related to rising pension liabilities and carrying costs.
