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By Jason Stipp and Rachel Barkley | 11-07-2013 11:00 AM

Top and Bottom in City Pension Health

Washington, D.C., leads city pension health while New York and Chicago face thousands in unfunded liabilities per capita, says Morningstar municipal credit analyst Rachel Barkley.

Jason Stipp: I'm Jason Stipp for Morningstar.

Morningstar just released its first city pension report, an inside look at the cost and liabilities associated with the pension plans in the largest U.S. cities.

Here to talk about the takeaways from that report is Rachel Barkley. She is a municipal credit analyst with Morningstar.

Thanks for joining me, Rachel.

Rachel Barkley: Thank you for having me.

Stipp: Can you explain first of all which cities you looked at? Which cities were in the criteria you used?

Barkley: We looked at the top 25 cities in the country based on population, and we chose these cities for a number of reasons.

First of all, they are the most likely of cities to have their own city pension plans, as opposed being in a state plan. The pension plans for these cities tend to be the larger of the city pension plans, and these cities themselves tend to be very important players not only in the bond market, but also in the overall national economy.

Stipp: You have released in the past two state pension plan reports, but this is a city pension plan report. And as you said, they can be separate, so it's important to consider both in some cases.

Barkley: Yes, that's a good point. In actuality, they should be combined whenever possible, so that you get a good sense of what a taxpayer, for instance, in the city of Chicago or in the city of New York would be required to pay or to fund for the combined city and state pension liability, as well as any other overlapping entities that would also have a pension liability.

Stipp: When we looked across all of these cities and when we aggregate the results, it's not an especially pretty picture.

Barkley: I would agree with that. So of the top 25 cities, we found that 22 of them have pension plans where they are either the sole employer or the majority participant. That means that respective city would be responsible for funding either all of the unfunded pension liability or at least the vast majority of it. That doesn't include some additional pension liability that very well may be there, and in some cases definitely is there, in state plans, but due to accounting regulations, we can't currently identify the exact magnitude of that.

However, just for these sole employers and majority participant plans, the numbers are quite staggering. For these cities we looked at, they have over $125 billion of unfunded pension liabilities. To put that in some perspective, these same cities have over $135 billion of outstanding direct debt. So you can see that pension liabilities have really grown to be comparable as a long-term liability for cities to their more traditional long-term liability of debt or bonds.

Stipp: When you are looking at the health of a city pension plan, there are few different metrics you use. Obviously, how much they are funded is one of those metrics, but can you describe the different ways and the different dimensions you use when you are figuring out [the health of] a city's pension plan?

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