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Pension Pressure Lingers For Largest U.S. Cities Despite Federal Stimulus


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Pension Pressure Lingers For Largest U.S. Cities Despite Federal Stimulus



Pandemic-driven federal funding from the CARES and American Rescue Plan (ARP) acts provided significant stimulus, helping to alleviate short-term budgetary pressure and stabilize overall budgetary operations of the 20 largest U.S. cities. While the cities surveyed cannot use the federal funds to directly support their pension systems, both CARES and ARP funds provided budgetary flexibility to allocate general funds to maintain pension funding. However, any significant economic shifts related to the pandemic or the economic recovery could reintroduce budgetary stress from pension costs, particularly as federal funds begin to abate in summer 2022.

S&P Global Ratings evaluates each city's largest pension plans, which account for most of the total pension liabilities for each municipality. Funded ratios remained stable, but as the COVID-19-related federal funding expires we expect local governments--large and small--will face difficult choices over the next few years.

Chart 1


The most-recent reported funded ratios for the 35 plans in this year's survey remained relatively stable, with the overall median increasing slightly, to 71.5% from 71.0% from last year, but remaining effectively unchanged from 71.4% two years ago. We estimate reported funded levels for many pension plans will improve in fiscal 2021 given generally strong market returns to date.

The funded ratio is highly dependent on the assumed market return, typically also the discount rate used to measure liabilities, but not in cases where funding discipline might be lacking. The average rate of expected asset return in the sample is about 7.0%, ranging from 6.5% (Washington and San Diego) to 8.0% for Columbus. The average of the discount rates is about 6.9%, ranging from 4.1% for Austin to 8.0% for Columbus. The difference in the discount and expected asset return rates is the result of five of the 35 plans in the sample having contributions meaningfully below the actuarial recommendation. We believe that governments will look to continue to lower assumed returns to reflect recent market volatility and economic conditions that could lead to unpredictable cost escalations. However, in the near term, cities may be unable or unwilling to do so, given the resulting increase in contributions, and uncertain budget forecast due to the slowing economic recovery (see "Economic Outlook U.S. Q4 2021: The Rocket Is Leveling Off," published Sept. 24, 2021, on RatingsDirect). S&P Global Ratings published discount rate guidance of 6.0% to represent our view of market volatility sufficiently contained for a typical pension plan (see "Assessing U.S. Public Finance Pension And Other Postemployment Obligations For GO Debt, Local Government GO Ratings, And State Ratings," published Oct. 7, 2019, and the corresponding "Credit FAQ: Pension And OPEB Guidance In U.S. Public Finance," published July 21, 2020). While several factors determine the funded ratio change year-to-year, adopting increasingly cautious 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 will determine changes to the funded ratio over time.

Pension, OPEB, And Environmental, Social, And Governance Risk

S&P Global Ratings has long included environmental, social, and governance (ESG) factors in its credit analysis and we continue to expand and refine our view on these factors in regard to pensions and other postemployment benefits (OPEB). In "Through The ESG Lens 2.0: A Deeper Dive Into U.S. Public Finance Credit Factors," published 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. Furthermore, in "ESG Brief: ESG Pension And OPEB Analysis In U.S. Public Finance," published Oct. 7, 2021, we note that ESG factors begin to overlap with our credit rating analysis for pension and OPEB when prioritization of plan contributions, through forward-looking plan governance decisions, is viewed through the lens of risk management, culture, and oversight.

How pension and OPEB plans are managed at the local level, including control framework and practical application as well as legal flexibility, can create governance concerns, or opportunities, for a local government. Should a local government not have control over the plans, like those in Dallas, Fort Worth, and Austin (discussed further below), our governance focus is on the governments' planning for increasing contributions, setting aside amounts in a dedicated fund to supplement escalating contributions, 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.

State and local governments perennially face revenue pressure that challenges budget priorities. If revenue growth becomes increasingly limited while at the same time fixed costs such as pensions, OPEBs, and debt obligations consume a larger portion of the budget, which we view as likely, it could crowd out spending on services or capital needs.

Chart 2


Fixed Costs Remain High Across Surveyed Cities

Chicago continues to have the highest fixed costs driven by pension pressures, compared with other large cities in the survey. However, other surveyed cities, both those experiencing rapid and slower-than-average population growth, have elevated fixed costs measured as a percentage of total governmental fund expenditures. Seven cities have a fixed-cost burden greater than 25%, and 11 have a burden greater than 20% of expenditures.

Higher fixed costs may not result in immediate rating pressure, but they could manifest in ways such as deferred capital investment, maintenance of lower reserve levels, or cuts to governmental services, which could cause negative rating pressures over the long-term. We generally expect fixed costs as a percent of the budget will grow unless proactively managed. However, deferring costs to future years, such as delaying capital investment, becomes more expensive in each passing year, and cutting services could result in population or tax base loss. In the short term, however, ARP funds should provide budgetary flexibility to prevent delays or cuts while also maintaining pension contributions for these 20 cities. However, 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.

Pension Costs Outpaced Expenditures During Decade Of Population Growth

Cities with the fastest-growing populations often have faster-growing economies and tax bases, providing these cities with additional options for revenue, and consequently they could more easily avoid service cuts, relative to cities with slower population and economic growth. All 20 cities surveyed realized population growth over the past 10 years according to the U.S. Census, by an average of 11.8%. Population growth varied as three cities realized population growth greater than 20%, and 10 cities grew by more than 10%.

Chart 3


Over the past decade, actual pension contributions more than doubled, increasing by 109%, on average, for the 20 cities surveyed, including nearly quadrupling for Chicago as the city ramped up to actuarially determined contributions. Over this period, total governmental expenditures increased for each of the city's surveyed--not surprising considering population growth and inflation--growing by an average of 44%. Therefore, in most cases pension contribution growth outpaced total expenditures. Since pension costs increased at a rate faster than expenditures, and in some cases were the major driver in the increase in total expenditures, cities will continue to face difficult budgetary decisions--reduce expenditures and often services or increase revenue.

One response to rising pension contributions for municipalities has been to issue pension obligation bonds (POB) as a means to address unfunded pension liabilities by issuing debt in hopes of capturing excess returns between portfolio investments over debt service costs. While none of the 20-largest cities surveyed have issued POBs in recent years, officials in some cities may see POBs as an opportunity to lower fixed-cost payments. Doing so could provide opportunities as well as risks which could cause budgetary pressures. For more on the current environment as well as our general views on POBs, see "Pension Obligation Bond Issuances Continue To Increase In 2021" published Oct. 14, 2021.

Chart 4


Most Recent Contributions Largely Fall Short Of Static Funding

Contributions to 15 city plans were below static funding, which are expected to be insufficient to maintain current funded ratios in the long term (orange bar). This is slightly better than last year when 18 of the 33 plans' contributions were insufficient. Over the next two years, we expect funding discipline will remain relatively consistent, as federal stimulus and strong market returns to date should alleviate some budgetary pressure that cities might have faced as a result of the pandemic.

It is important to note that MFP and static funding look only at the most recent audited financial statements. Within our analysis, we compare the actuarial funding plan going forward against our guidelines. For example, a long level-percent amortization might defer costs to the future and could even lead to contributions falling below static funding, particularly if the payroll growth assumption is high. We then look at each sponsor's individual budgetary characteristics when assessing affordability.

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. As shown in chart 4 (above), a significant number of the top two plans of our largest cities did not meet our static funding metric (plan contributions in excess of static funding are represented by the dark blue bar). Cities that did not meet static funding or only do so in economic growth periods could be at risk of missing expected contribution metrics during periods of economic stagnation or recession. ARP funds should provide cities the fungibility, and opportunity, to at least maintain funding discipline over the next two years. However, if cities fall below static funding--in the short or medium term--we expect declining funded ratios and higher future costs. While we included both plans for Denver and Indianapolis in chart 1 to show the funded ratios, we excluded the second plan for each city in chart 4 due to low net pension liabilities associated with the cities that we consider de minimus.

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


An independent board of trustees administers each city's plans, and state law governs benefit and contribution provisions. Amendments may be made by the Legislature of the State of Texas. For all three systems, minimum contributions are determined by enabling legislation. While contribution requirements are not actuarially determined, state law requires that a qualified actuary approve each plan of benefits adopted. In fiscal 2020, Austin paid $127 million to City of Austin Employees' Retirement System (COAERS), which was approximately $21 million less than the actuarially determined contribution. Contributions to the police and fire plans in 2020 were $36.2 million and $21.1 million, respectively, and generally matched the annual statutorily required contribution amount.

During the 2021 state legislative session, the city made changes to its police pension plan. Most notably, changes defined in House Bill 4368 reduced the plan funding period from infinite to 30 years, which was the result of adding a new benefit tier, shifting to an actuarial determined funding model, adding legacy liability payments, increased member contributions, and changes in the governance structure. We anticipate that the plan's net pension liability will decrease significantly in the near term (to $605.9 million from $1.3 billion), largely due to reforms allowing for the use of the fund's assumed rate of return of 7.25% versus a blended rate of 4.1% in 2019. City officials are also in the early stages of planning for reforms of the employees' retirement pension plan, which would take place at the next legislative session in summer 2023. The city also raised contributions by 1% of payroll in January 2021.

While reforms of the police pension system are favorable and should support an improved funded status and lowered net pension liability over time, inability to meet its current return assumptions across all plans could further weaken Austin's combined pension profile. Although we understand the city has the current flexibility to adjust to higher fixed costs, its long-term ability to do so also presents challenges. We expect that lower levels of future budgetary flexibility and an outlook of higher fixed pension costs could negatively affect future budget results. We believe rising fixed costs across pension and OPEB are the most significant risk to Austin's overall credit quality. Future credit reviews will focus on the city's ability to establish reforms that allow for affordable pension and OPEB costs while addressing net pension and OPEB liabilities.


Chicago continues to address its severely underfunded pensions as it has done for many years. When full actuarially based statutory payments reach $2.275 billion in 2022, this amount will be $967 million more than the city's contributions in 2019. Despite the strides it has made to incorporate the sharp rampup in pension contributions, Chicago's pension funding levels will remain weak for the foreseeable future. The delay in addressing the problem is exacerbated by pegging the funding pace to the Illinois funding goal of 90% over 40 years, which is significantly less than S&P Global Ratings' guidance to amortize 100% of the obligation in 20 years. However, of equal concern in the short run is the city's high combined debt service, pension, and OPEB carrying charges of 36.8%, which crowd out the city's ability to fund other needs.

We would view negatively any measure that lowers annual contributions to Chicago's pension systems, particularly given the city's low funded ratios (combined funding of 23.5%) and the fact that the pension funds already must liquidate assets to make annual benefit payments. Given pension fund earnings vary year to year, if the city offsets pension contributions based on better-than-budgeted performance the previous year, it would slow the pace of funding and extend pressure on credit quality even further.


The funding level of the city's pension plan continues to improve due to reforms and higher contributions, which exceeded our MFP. However, Philadelphia's funding level remains low compared with that of peers, and it is a high fixed cost. The city made contributions in line with its revenue recognition policy (RRP) in 2020, which is above Pennsylvania's mandated minimum municipal obligation (MMO) payment. Philadelphia made contributions above the RRP in previous years, but due to COVID-19-related financial pressures, it did not contribute above its RRP in 2020 or 2021. The city's five-year plan assumes it will fund its pension in accordance with its RRP annually.

As of the July 1, 2020, actuarial analysis, plan funding improved to 51.9%, using a 7.5% discount rate assumption. Under current assumptions, the plan is expected to be 80% funded by 2029 and 100% by 2033, but we view some of these assumptions to be aggressive and that notable improvement in plan funding will likely require more time to come to fruition. The city gradually lowered its discount rate over the past 10 years, to 7.50% as of July 1, 2021, from 8.10% in 2011. However, 7.50% is still high relative to S&P Global Ratings' guideline of 6.00%, so in a downturn, the city could be pressured to increase its pension contributions. The plan is amortized for a closed period and mortality rates have been updated, which we believe are stronger planning components. We believe that one of the keys to Philadelphia reaching its funding goal will be continued strong contribution levels in line with or above its RRP, which help mitigate the potential for market-rate fluctuations and lower-than-targeted investment returns.

Table 1

Appendix--Key Metrics And Pension Plan List
City Per capita net pension and OPEB liability ($) Weighted funded ratio % (largest two plans) Most recent year fixed costs % expenditures Plan 1 Plan 2


6,782 56.82 24.45 City of Austin Employees' Retirement and Pension Fund City of Austin Police Officers' Retirement and Pension Fund


1,019 88.61 20.13 Local Governmental Employees' Retirement System N/A


12,987 22.61 41.57 Policeman's Annuity and Benefit Fund Municipal Employees' Annuity and Benefit Fund


1,456 84.39 19.10 Ohio Public Employees Retirement System Ohio Police and Fire Pension Fund


3,827 55.01 26.14 Employees' Retirement Fund Dallas Police and Fire Pension System


2,038 81.33 7.79 Denver Employees Retirement Fund Fire and Police Pension Association

Fort Worth

3,662 50.59 14.62 Employees' Retirement Fund N/A


2,050 68.09 25.11 Houston Police Officers' Pension System Houston Municipal Employees Pension Fund


410 85.85 27.10 Indiana Public Employees Retirement Fund 1977 Police Officers' and Firefighters' Retirement Fund


3,231 56.04 18.21 Police and Fire Pension Plan General Employees' Retirement Plan

Los Angeles

2,785 82.38 26.99 Los Angeles Fire and Police Pension System Los Angeles City Employees' Retirement System

New York City

17,682 79.91 25.97 New York Employees Retirement System New York City Teachers Retirement System


3,896 48.26 18.64 Philadelphia Municipal Pension Fund N/A


2,709 51.21 13.97 Phoenix Employees' Retirement System Public Safety Personnel Retirement System

San Antonio

1,486 83.52 15.00 San Antonio Fire and Police Pension Fund Texas Municipal Retirement System

San Diego

2,215 74.50 19.79 San Diego City Employees' Retirement System N/A

San Francisco

5,699 83.11 20.89 San Francisco Employees' Retirement System N/A

San Jose

4,297 62.21 20.44 Police and Fire Department Retirement Plan City Employees' Retirement System


2,674 104.53 30.88 Law Enforcement Officers' and Fire Fighters' Retirement System Seattle City Employees' Retirement System

Washington, D.C.

(538) 104.23 10.26 Police Officers and Firefighters Retirement Fund Teachers Retirement Fund
N/A--Not applicable.

Table 2

Appendix--Analytical Contacts
GO rating Rating date Primary analyst Email
Austin AAA/Stable 8/26/2021 Andy Hobbs
Charlotte AAA/Stable 6/30/2021 Nora Wittstruck
Chicago BBB+/Stable 11/3/2021 Jane Ridley
Columbus AAA/Stable 12/22/2020 Randy Layman
Dallas AA-/Stable 10/21/2021 Andy Hobbs
Denver AAA/Stable 11/10/2020 Jane Ridley
Fort Worth AA/Stable 5/26/2021 Emily Powers
Houston AA/Stable 8/9/2019 Andy Hobbs
Indianapolis AA+/Stable 3/22/2021 Anna Uboytseva
Jacksonville AA/Stable 8/11/2021 Jennifer Garza
Los Angeles AA/Stable 10/14/2021 Jennifer Hansen
New York AA/Stable 5/18/2021 Nora Wittstruck
Philadelphia A/Stable 7/16/2021 Cora Bruemmer
Phoenix AA+/Stable 5/25/2017 Alyssa Farrell
San Antonio AAA/Stable 6/8/2021 Karolina Norris
San Diego AA/Stable 3/22/2021 Jennifer Hansen
San Francisco AAA/Negative 3/25/2021 Chris Morgan
San Jose AA+/Stable 10/13/2021 Li Yang
Seattle AAA/Stable 4/15/2021 Chris Morgan
Washington, D.C. AA+/Stable 11/2/2021 Timothy Barrett

This report does not constitute a rating action.

Primary Credit Analyst:Bobby E Otter, Chicago + 1-312-233-7071;
Secondary Contacts:Todd D Kanaster, ASA, FCA, MAAA, Centennial + 1 (303) 721 4490;
Christian Richards, Washington D.C. + 1 (617) 530 8325;
Geoffrey E Buswick, Boston + 1 (617) 530 8311;
Jane H Ridley, Centennial + 1 (303) 721 4487;
Andy A Hobbs, Dallas + 1 (972) 367 3345;
Cora Bruemmer, Chicago + 1 (312) 233 7099;

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