PEW: 61 City Retirement Systems Faced $217B Gap in Fiscal 2009

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Sixty-one of the largest U.S. cities in the nation came out of the Recession facing a gap of more than $217 billion between the pension and health care benefits they promised to pay workers and the funds they saved to pay those bills, a new report by the Pew Charitable Trusts found.

The 55-page report, entitled A Widening Gap in Cities Shortfalls in Funding for Pensions and Retiree Health Care, examined the comprehensive annual financial reports of cities located in all 50 states, but could only get a complete set of data for fiscal years through 2009.  The report, however, includes 2010 data for 40 cities.

The 61 cities represent approximately half of all municipal employees in the nation. Their pension and health care retiree benefits declined to 74% in 2009 from 79% in 2007.

For pensions alone, cities had a shortfall of $99 billion in fiscal year 2009, the report found.

Twenty-four cities had pension funding levels of 80% or above, which is considered a healthy, and 37 cities had funding levels below 80% for fiscal 2009.

“Whether a city was fiscally disciplined made a big difference in how it fared,” the report said. “Cities with pension plans that kept up with their payments — consistently making the ‘annual recommended contribution’ calculated by their actuaries — weathered the financial downturn better than their counterparts.”

Only 16 cities were able to both keep their pension funding above 80% and consistently make at least 90% of their annual pension payments between 2007 and 2009. Thirty-five cities paid at least 90% of each year’s annual recommended sum between 2007 and 2009.

Altogether, 74% of cities had enough money to cover pension obligations, compared with 78% of states.

The best pension-funded cities were Milwaukee, at 113%, and Washington, D.C., at 104%. This was better than New York, the best funded state, at 101%.

On the other end of the spectrum were four cities: Charleston, W. Va., at 24%, Providence, R. I., at 42%, Omaha, Neb., at 43%, and Portland, Ore., at 50%. They were more poorly funded than Illinois, the lowest-funded state, at 51%, the study said.

“Cities like Charlotte, Milwaukee, and San Francisco show that pension obligations can be met in a sustainable and affordable way that benefits employees and taxpayers,” said David Draine, senior researcher at the Pew Center on the States. “On the other hand, rising costs for poorly funded pension systems can crowd out funding for other city priorities like roads and education, lead to tax increases, or threaten retirement benefits.”

There are three key factors that lead to pension underfunding: the failure to faithfully pay annual retirement bills; the failure to meet expectations for investments and other assumptions; and increasing benefits without a way to pay for them.

“Cities’ pension plans will continue feeling the impact of the Great Recession ... so 2008 and 2009 losses are still being reflected,” the report said. “And even though investment earnings are improving, gains have not made up for those losses.”

The report warned that in the coming year cities are likely to face greater public scrutiny of retirement costs that may make their funding levels look even worse than they are today due to the financial reporting changes approved by the Governmental Accounting Standards Board last June.

Pension problems also “trickle up” and can land on the doorstep of state policymakers, Pew said.

For example, Rhode Island was forced to beef up its efforts to aid distressed cities after Central Falls filed for bankruptcy protection in 2011.

Pension reforms are not only being adopted for underfunded systems, but also for some of the best funded cities due to rising annual pension costs eating larger portions of budgets post-recession.

For example, San Francisco, which consistently made 100% of its pension contributions, saw its funding level slip from surpluses to 97% in fiscal 2009. As a result, voters passed a package of reforms in November 2011 that included increases in employee contributions and limits on retirees’ cost-of-living adjustments. Similarly, Milwaukee, which had a 113% funding level in fiscal 2009, has considered reforms based on recommendations from a pension task force.

For health care and other benefits, the cities had shortfalls totaling $118 billion.

Only two cities had funding levels of 50% or more, the report found. Los Angeles was funded at 55% and Denver at 51%.

At least 25 cities had funding levels of 0.01% to 49%. Some of the largest cities that had 0.0% funding of health care and other benefits included Atlanta, Boston, Chicago, Dallas, Houston, Las Vegas, Milwaukee Minneapolis, Nashville, New Orleans, Philadelphia and Salt Lake City, and Seattle.

New York had a funding level of only 4%.

The report noted that it is easier to make changes to retiree health benefits for current employees than pension benefits because the court system is less likely to consider non-pension benefits to be a protected right.

The report emphasized that the funding levels for pension and health care retirement systems affect credit ratings.

“Credit ratings are based on several criteria, one of which is the level of unfunded liabilities for public sector retirement benefits,” the report said.

It cited Omaha, Neb. as an example, noting that Moody’s Investor Service downgraded its credit rating for the city’s bonds last September because of “persistent under-funding of its pension obligations.” The downgrade occurred even though the city had adopted pension reforms for police.

The study looked at 61 cities ranging in size from New York City with more than 8 million residents to Burlington, Vermont with just over 42,000 residents. The study also analyzed 193 pension plans and 100 plans that cover other post-employment benefits.

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