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Mounting Pressures Threaten Stability Of 20 Largest U.S. Cities' Pension Funding


The Post-Election Landscape For U.S. Public Finance


Approval Of Nontraditional Revenues Dominates Recent Ballot Measures For U.S. State And Local Governments


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U.S. State Ratings And Outlooks: Current List

Mounting Pressures Threaten Stability Of 20 Largest U.S. Cities' Pension Funding

Increasing economic and budgetary pressures are likely to reduce pension funded ratios and weaken funding discipline among the 20 largest U.S. cities at the end of fiscal 2020. Despite stable funded levels prior to the COVID-19 induced recession, significant economic shifts place future funding progress at risk as the cities surveyed, as with local governments across the country, contend with difficult budgetary choices.

S&P Global Ratings evaluates pension and other postemployment benefit (OPEB) liabilities on a forward-looking basis based on financial and debt metrics, managerial practices, and economic considerations. We expect past policy choices, such as underfunding contributions, adjusting actuarial assumptions, and reducing benefits, will inform local governments' future funding decisions as the country recovers from the short, but deep, recession caused by the pandemic. This year we expanded the survey to the 20 most populous cities from 15, reflecting population growth and demographic changes among America's cities. We focused on each city's largest one or two pension plans, which account for the majority of total and net pension liabilities for each municipality. For those plans with a second plan accounting for less than 10% of overall net pension liability, we only included the largest plan. While funded ratios and fixed costs, which includes pension and OPEB contributions and debt service costs, remained stable relative to the past few years, we expect local governments--large and small--to face difficult choices over the next few years that will be informed by the current status of pension, OPEB and debt liabilities.

Chart 1


The most-recent reported funded ratios for the 33 plans in this year's survey remained relatively stable, with the overall median declining less than one percentage point, to 71.0% from 71.4% from last year, and improving overall from 68.3% two years ago. The survey's median 2019 funded ratio is also on par with the median 72.1% funded ratio of the plans in the Center for Retirement Research at Boston College's Public Funds Database for fiscal 2019.

The average of the discount rates used to measure liabilities in the sample is about 6.9%, while the average rate of expected asset returns is about 7.2%. The difference in the rates is the result of five of the 33 plans in sample having GASB crossover dates. We believe that governments will look to continue to lower discount rates to reflect recent market volatility and economic conditions; however, in the current budget environment cities may be unable or unwilling to do so, given the likely resulting increase in contributions. S&P Global Ratings recently decreased its discount rate guidance to 6.0% from 6.5% (see "Guidance: Assessing U.S. Public Finance Pension And Other Postemployment Obligations For GO Debt, Local Governments GO Ratings, And State Ratings," updated July 21, 2020, and the corresponding "Credit FAQ: Pension And OPEB Guidance In U.S. Public Finance," July 21, 2020). While several factors determine the funded ratio change year-to-year, adopting increasingly conservative actuarial assumptions--such as lowering the discount rate--can reduce a plan's funded status. As local governments reduce risk from plans' assumptions, strength of funding discipline may foreshadow changes to the funded ratio.

Chart 2


Most Recent Contributions Largely Fall Short Of Static Funding

S&P Global Ratings views contributions to 18 of the 33 plans in this year's survey as insufficient to maintain current funded ratios. We expect, given the recession and resulting revenue and expenditure pressures, that funding discipline is unlikely to improve over the next few years. S&P Global Ratings measures contribution sufficiency based on a combination of an assessment of the forward-look actuarial recommendation, as well as our backward-looking "static" and "minimum funding progress" (MFP) metrics. Our static funding and MFP metrics measure whether a given pension plan is maintaining current funding levels but not making progress in funding the liability, or making material progress in funding its unfunded liability, respectively. As shown in chart 2, a significant number of the top two plans of our largest cities (33 plans total) did not meet our static funding metric (as evidenced by the gold bar) while plan contributions in excess of static funding are represented by the dark blue bar. Chart 3 shows only one year of funding discipline, but is generally consistent with prior years. While there are some exceptions, such as Washington, which fell short of static funding but has very well-funded pension plans, cities that did not meet static funding or only contribute in excess of static funding in economic growth periods may be increasingly unlikely to meet those contribution metrics during periods of economic stagnation or downturn. As cities fall below static funding, we expect declining funded ratios and higher future costs.

It is important to note that these metrics look only at the most recent year. Within our analysis, we compare the actuarial funding plan going forward against our guidelines. For example, a long level-percent amortization may be considered to be deferring costs to the future and could even lead to contributions falling below static funding, particularly if the payroll growth assumption is high. When assessing the actuarial recommendation, we look at each sponsor's individual budgetary characteristics when assessing affordability.

Pension, OPEB and Environmental, Social and Governance (ESG) Risk

S&P Global Ratings has long included ESG factors in its credit analysis. In "Through The ESG Lens 2.0: A Deeper Dive Into U.S. Public Finance Credit Factors," April 28, 2020, we note planning initiatives and how those practices mitigate future risks including those associated with rising pension and OPEB costs, are included in our view of governance. Primarily, governance of the pension and OPEB plans, if managed at the local level, including regular review of assumptions to match the plan experience, can be governance concerns or opportunities for a local government. Should a local government not have control over the plans, such as those in Dallas, Fort Worth and Austin, our governance focus is on governments' planning for increasing contributions, setting aside amounts in a trust fund to offset the liability, or including higher contribution costs in future financial forecasts. In our view, a lack of planning around these costs and how management teams will prioritize competing interests, including funding pension and OPEB liabilities can affect long-term credit stability.

We expect that state and local governments will continue to face revenue pressure that challenges budget priorities. In this new period of limited revenue growth, increasing fixed costs from debt, pensions, and OPEBs will likely consume a larger portion of the budget, consequently crowding out spending on essential services such as education and public safety, or management teams may need to reduce these fixed costs through delayed capital investment or deferred pension and OPEB costs to alleviate budget stress. (See "Credit Conditions North America: Potholes On The Road To Recovery," Sept. 29, 2020.)

Chart 3


Fixed Costs Remain High Across Surveyed Cities

Consistent with recent surveys, Chicago has materially higher fixed costs, driven by pension pressures, when compared to other large cities in the survey. However, other surveyed cities also have elevated fixed costs measured as a percentage of total governmental fund expenditures. Seven cities have a fixed cost burden greater than 25%, nine are higher than 22%, and 14 have a burden greater than 20% of expenditures. While S&P Global Ratings' local government criteria prescribes fixed costs approaching 50% as the threshold at which ratings could be capped, we would anticipate budgetary pressure to begin at significantly lower levels. Higher fixed costs may not result in material rating pressure, but it could manifest in ways such as deferred capital investment, maintenance of lower reserve levels or forgone service delivery, which could result in negative rating pressures over the long-term. We generally expect fixed costs as a percentage of the budget to grow unless proactively managed. However, deferring costs to future years, such as delaying capital investment, becomes more expensive in each passing year. If funding discipline of retirement liabilities falters, costs pushed into future years are also likely to consume a greater portion of the budget than if they were otherwise paid over a more reasonable period.

Social factors could affect funding discipline

Changing demographics, health and safety issues such as COVID-19, and the affordability of service demands all fall under our view of social risks when analyzing environmental, social and governance (ESG) factors. However, economic metrics such as wealth and income may be one demographic data point that informs governments' ability to afford future retirement costs. As officials balance competing priorities, the confluence of governance and social factors could lead to improved or deteriorated funding discipline, which itself affects future budgetary decisions and could lead to higher unfunded liabilities and rising costs that could limit flexibility in a given budget year. As governments weigh options to balance budgets, those cities with growing economies may have additional options for revenue, and consequently avoid service cuts, relative to cities with slower economic growth.

Chart 4


As chart 4 shows, IHS Markit projects varied economic performance among U.S. cities including significant overall economic contraction in San Francisco in 2020, but projects that from 2021-2023 the metro region will significantly outpace the country's total average growth. We anticipate this would result in an ability to better generate additional revenue, contrasted with those cities below the U.S. average, and consequently an improved likelihood of continued positive funding progress. Additionally, we would anticipate cities with high per capita wealth, such as Denver, and relatively low unfunded liabilities, would be able to maintain generally positive funding progress despite closer to average economic growth. This does not account for local or state restrictions on raising revenue, or local requirements for strong funding discipline, but provides a framework through which to view broad budgetary expectations based on economic performance. Alternatively, cities such as Jacksonville and Chicago, with low growth expectations and higher unfunded liabilities, may face more difficult budgetary challenges due local economic and social conditions. However, even relatively high growth cities may find it difficult to generate new revenues during the economic recovery, resulting in difficult decisions

Case Studies: Cities Grapple With Competing Demands And Uncertain Economic Recovery


For several years Chicago has been ramping up to full actuarial funding for its pensions in 2022 and the road to accommodating increased funding in its budget got much more difficult in 2020 and 2021 thanks to COVID-19 closures and the sudden-stop recession. As of October 2020, COVID and the recession had led to a projected budget shortfall of nearly $800 million in 2020, which grows to $1.2 billion in 2021. Following net losses in 2018 for all four pension funds--police, fire, muni and laborers--2019 performance showed investment gains for each fund, between 16.3% and 19.6%. Despite improved funding discipline and higher-than-expected investment returns, Chicago's pensions remain woefully underfunded and given the actuarial funding level 90% funding over 40 years, we still consider funding discipline to be weak overall. Additionally, the very poor funded ratios and overall negative liquidity-to-assets ratio indicate the presence of liquidity risk.

We view the city's plans for the ramp-up to the full actuarial-based statutory minimum contribution in 2022 as positive in direction, but it comes after years of contributions well under what we consider to be minimum funding progress. To manage the obligations, in the past Chicago has considered issuing pension obligation bonds, whose long-term risks can outweigh any temporary advantages. Given the size of the unfunded liability, such a sizable POB would entail significant ongoing carrying costs which are already over 47% of governmental funds expenditures. Given the magnitude of the problem and reliance on market returns to stay on track with pension funding, it is possible that even if the city takes all the right steps to grow contributions, effects from COVID-19 and the recession could still result in fund performance that sets funding levels further back. sources, such as increasing the property tax.

New York

Due to the pandemic and the revenue loss associated with the economic shutdown, lack of global tourism, and working-from-home dynamics, the city is drawing $2.6 billion from its retiree health benefits trust fund to help maintain budgetary balance in fiscal years 2020 and 2021 (using $1 billion in FY20 and $1.6 billion in FY21). Although these reserves are not restricted to offset the OPEB liability, they have historically modestly reduced the liability. The city has reduced headcount in the past and has considered laying off 22,000 employees in order to maintain budgetary balance in fiscal 2021, but so far only targeted furlough days were implemented. If the active-to-beneficiary ratio declines significantly, this may lead to a reduced ability to share risk as well as increase necessity to maintain liquidity in the asset portfolio. Favorably, the city has been successful in some recent labor agreements in obtaining concessions on healthcare contributions, which may offset some costs associated with these benefits over the long term.


We currently believe the city has sufficient flexibility to maintain adequate budgetary performance in the near term despite elevated fixed costs at 14% of the total governmental funds budget. Jacksonville has maintained positive operating results in its general fund since 2014 as revenue growth has outpaced expenditure growth. The city has committed to address its unfunded retirement liabilities through the "Better Jacksonville" infrastructure sales tax revenues program. Once the existing bonds that are secured by the current infrastructure sales tax fully mature, which is currently scheduled for 2030 but projected to be sooner, the pension liability surtax is legally required to fund the city's pension plans, which provides budgetary relief. Management also increased employee contributions to the system. The future pension liability surtax cash flows are assumed to grow 4.25% annually to reach $155 million in 2031 and $519 million in 2060. However, in three out of the last five fiscal years, sales tax growth has been less than 4.25% and the city is projecting a 10% annualized increase in this revenue stream for 2021, subsequent a 10% decline realized in 2020. During 2019 the sales tax revenue generated $92.7 million in comparison to the total pension contribution cost of $219.8 million. The city is required to meet its annual required contributions under Florida law as it has historically done. We will continue to monitor to what extent actual sales revenues meet growth projections, pension contributions pressure the budget, and any liquidity challenges that may arise with the DROP feature in the police and fire plans. Though they have a liquidity floor, we will monitor liquidity risks and the extent it will be sufficient given that it may be several years before the revenue stream kicks in.


Key Metrics And Pension Plan List
City Per capita NPL+NOL ($) Weighted funded ratio (2 largest plans)(%) 2019 fixed costs % of expenditures Plan 1 Plan 2


5,575 53.9 25.0 City of Austin Employees' Retirement and Pension Fund City of Austin Police Officers' Retirement and Pension Fund


1,112 91.2 23.8 Local Governmental Employees' Retirement System Not Applicable (NA)


12,050 22.6 47.4 Municipal Employees' Annuity and Benefit Fund Policeman's Annuity and Benefit Fund


1,944 80.3 19.7 Ohio Police and Fire Pension Fund Ohio Public Employees Retirement System


3,939 53.0 25.9 Dallas Police and Fire Pension System Employees' Retirement Fund


4,410 42.9 14.4 Denver Employees Retirement Fund NA

Fort Worth

2,331 79.2 20.5 Employees' Retirement Fund NA


2,632 72.2 25.5 Houston Municipal Employees Pension Fund Houston Police Officers' Pension System


321 85.6 22.7 Indiana Public Employees Retirement Fund NA


3,222 56.0 26.3 Police and Fire Pension Plan General Employees' Retirement Plan

Los Angeles

2,644 83.3 28.1 Los Angeles City Employees' Retirement System Los Angeles Fire and Police Pension System

New York City

17,346 79.4 21.1 NY City Teachers Retirement System NY Employees Retirement System


4,974 48.3 14.1 Philadelphia Municipal Pension Fund NA


3,082 51.6 24.5 Phoenix Employees' Retirement System Public Safety Personnel Retirement System

San Antonio

1,568 77.0 20.5 San Antonio Fire and Police Pension Fund Texas Municipal Retirement System

San Diego

2,183 73.9 19.1 San Diego City Employees' Retirement System NA

San Francisco

9,007 84.8 20.9 San Francisco Employees' Retirement System NA

San Jose

4,187 62.8 31.2 Federated City Employees' Retirement System Police & Fire Department Retirement Plan


3,303 106.5 11.2 Seattle City Employees' Retirement System Law Enforcement Officers' and Fire Fighters' Retirement System

Washington, D.C.

(656) 105.2 7.7 Teachers Retirement Fund Police Officers and Firefighters Retirement Fund

Analytical Contacts
City GO Rating Rating date Primary analyst Email
Austin AAA/Stable 9/30/2020 Amahad Brown
Charlotte AAA/Stable 2/4/2020 Nora Wittstruck
Chicago BBB+/Negative 4/24/2020 Jane Ridley
Columbus AAA/Stable 9/16/2019 Benjamin Gallovic
Dallas AA-/Stable 9/25/2020 Andy Hobbs
Denver AAA/Stable 11/4/2019 Jane Ridley
Fort Worth AA/Stable 5/22/2020 Andy Hobbs
Houston AA/Stable 8/9/2019 Andy Hobbs
Indianapolis AA+/Stable 6/26/2019 Anna Uboytseva
Jacksonville AA/Stable 8/6/2020 Jennifer Garza
Los Angeles AA/Stable 7/29/2020 Jen Hansen
New York AA/Stable 10/2/2020 Nora Wittstruck
Philadelphia A/Stable 8/21/2020 Lisa Schroeer
Phoenix AA+/Stable 5/25/2017 Alyssa Farrell
San Antonio AAA/Stable 7/27/2020 Karolina Norris
San Diego AA/Stable 5/29/2020 Li Yang
San Francisco AAA/Stable 10/9/2020 Chris Morgan
San Jose AA+/Stable 8/31/2020 Tim Tung
Seattle AAA/Stable 8/4/2020 Chris Morgan
Washington, D.C. AA+/Stable 2/8/2019 Timothy Barrett

This report does not constitute a rating action.

Primary Credit Analyst:Christian Richards, Boston (1) 617-530-8325;
Secondary Contacts:Todd D Kanaster, ASA, FCA, MAAA, Centennial + 1 (303) 721 4490;
Timothy W Little, New York + 1 (212) 438 7999;
Jane H Ridley, Centennial (1) 303-721-4487;
Geoffrey E Buswick, Boston (1) 617-530-8311;
Nora G Wittstruck, New York (1) 212-438-8589;
Jennifer K Garza (Mann), Farmers Branch (1) 214-871-1422;
Research Assistant:Tyler Fitman, Boston

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