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Morningstar Releases Its State of City Pension Plans 2013

We have analyzed the pension plans and liabilities for the 25 most populous U.S. cities.

Rachel Barkley, 11/12/2013

We are pleased to announce the first of what we expect to be annual city pension report, The State of City Pension Plans 2013.

There is no denying that the pension liabilities of our nation's states and local governments represent a significant financial challenge. Public pension costs and liabilities have escalated, pressuring the finances of state and local governments still hampered by the recession. Current data indicate that these pressures are expected to persist and perhaps even intensify. We believe pensions will play an integral role in determining a government's fiscal health and overall credit quality.

Despite their importance, the inner workings of pensions are often not fully understood. To help investors better understand public pensions and their potential impact on governments, taxpayers, and investors, Morningstar has initiated ongoing, comprehensive research on the topic. We previously concentrated on state pensions because they constitute many of the nation's largest plans and often cover local governments along with the state and its related entities. Our annual State of State Pension Plans has served as the cornerstone of this endeavor for the past few years.

However, the nation's largest cities often maintain their own pension plans, separate from those administered by the states. Therefore, in order to bring further clarity to the pension burden facing these entities, we are expanding our coverage and analysis with our State of City Pension Plans report. Click here for an excerpt of the report and here to download the full report.

We have analyzed the pension plans and liabilities for the 25 most populous U.S. cities.We believe the pension plans for these cities are of particular importance. The selected cities tend to administer their own pension plans, in which they are either the sole or majority employer. Overall, 22 of the largest 25 cities have the majority of their pension liabilities tied to single employer, agent multiple-employer, or cost-sharing multiemployer, or CSME, plans in which the city is the majority participant. This means that the pension liability will have to be funded either solely or mainly by the city. Large cities also tend to have greater autonomy in terms of pension benefits and, in many cases, funding decisions.

Funding these plans can be a substantial burden to these governments, often accounting for a larger portion of annual spending than debt service. In rare cases, this has even led to municipalities filing for bankruptcy.

We also focus on the most-populous 25 cities because of their role in the economy and the municipal bond market. These cities are economic centers regionally, and in some cases, nationally. They are also large issuers of debt, with more than $132 billion of outstanding direct debt. As pensions continue to be a key driver of city credit quality, the fiscal health of pension plans for these 25 cities will be critical in the overall credit quality for a significant portion of the market.

The goal of this report is to clearly explain how each city's pension plan is structured, whom it covers, and how fiscally sound our analysis finds it to be. As most large cities participate in multiple plans, we aggregated data to determine the key ratios for all systems and plans to which each city contributes. Individual data for each plan are also included in the report, as individual plans can often have funded ratios that are above or below the aggregate for the respective city.

Rachel Barkley is a municipal credit analyst with Morningstar.

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