By Richard A. Ciccarone, President & CEO of Merritt Research Services, LLC and Co-Owner of MUNINET, LLC
The Top 21% of Cities With High Pension Funding Levels Deserve Attention and Usually Praise
With so much well-deserved negative attention focused on cities with huge unfunded pension overhangs, it’s probably a good time to draw attention to the cities that are not burdened by pension liabilities. Cities, which have maintained adequate pension set-aside contributions based on reasonable actuarial assumptions fit the bill of practicing responsible management and have earned a pat on the back.
Only about three percent (3%) of all cities with populations of at least 30,000 have fully funded their total pension liabilities. Another 18% of these cities have funded their pension liabilities by 90% to 99%. That means that approximately 21% of all cities are in very good to excellent shape on pensions.
Beyond the best funded cities shown in the chart above, 19% of all cities bear a marginally fair to good funding ratio of 80% to 89%.
In contrast to cities which have fully funded pensions, the pie chart below shows that an equal 3% of cities have consolidated pension plan liabilities of less than 50%.
The remainder of all cities in the study carries a funding ratio between 50% and 80%. A breakdown of the city pension funding
This assessment of pension funding status is based on a new study of 1271 cities by Merritt Research Services, LLC, an independent municipal bond data and research company.
Chart 1. Percent Consolidated Funding Ratio Breakdown
The Merritt Research city funding ratios is calculated by deriving a consolidated funding position for each city accounting for all of a city’s pension plans, regardless of whether they are the sole responsibility of that city (single or agent plans) or if they are their share of the of a city’s liability as part of a multiple employer plan.
These percentages are preliminary and likely to change somewhat since the analysis is based on the most recent city audits available to Merritt Research as of June 21, 2019. That means that audit years may contain both fiscal years 2017 and 2018. Specifically, 57% of the city audits relate to fiscal year 2018.
In the absence of the FY 2018 audit, Merritt used the FY 2017 audit. Because most city audits n take six months to a year or longer to be completed and reported, a large number of cities with fiscal years closing on December 31, 2018 are just becoming available.
To make matters more complicated but without usually impacting the final analysis materially, city audit fiscal year end periods may differ from their individual pension plan audits. In those cases, the pension funding measurement period may lag the city audit fiscal year end by one year.
Which Cities Are the Best Funded?
The table below lists the top 25 funded pension plans in the United States for cities with populations over 30,000 based on the most recent fiscal year audit available.
At the top of the list, the city of Bristol, Connecticut leads all other cities with a substantial 2018 fiscal year end funded ratio of 148.2% Although an optimistic discount rate used by a plan can cause the funding ratio to be higher than would be typically expected, Bristol’s Merritt derived weighted average discount rate of 7.3% on its total pension liability falls close to middle of the pack among city pension plans nationally.
Following Bristol on the best funded pensions list are three cities in Michigan (Kalamazoo, Pontiac, and Troy), one in Missouri (Blue Springs), one in the state of Washington (Lakewood) and one in California (Fresno). Of those mentioned, Troy is the only one with a median household income that is significantly higher than the national average.
Pontiac may be a surprise city on the best funded list because it has been subject in recent years to the State of Michigan Treasury office’s financial emergency supervision program. Fresno, California, the largest city with an overfunded pension position, had its pension funding status substantially enhanced when it issued a large pension funding bond issue in 2002. Issuing pension bonds to pay down pension liabilities normally transfers risk to bondholders in place of pension plan beneficiaries.
Top 25 Highest Funded U.S. Cities Based on Combined Pension Funding Ratio and Average Discount Rate on Combined Plans:
|Population||Grand Total Funded
|Derived Weighted Average
Discount Rate on Total Pension Liability
|Lower Merion Twp.||PA||2017||59,021||109.01||7.20|
|Shelby Charter Twp.||MI||2017||79,152||103.51||7.50|
Source: Merritt Research Services, LLC * Most recent audit refers to either the FY 2017 or FY 2018 City C AFR audits. Pension plan audit years often lag by one from the city audit due to preparation/measurement timing differences.
A Cautionary Note
Much to their credit, cities with well-funded pension plans can look forward to less uncertainty relative to potential tax increases and threatening budget squeezes to offset the possibility of future economic downturns or pension actuarial assumptions that are not realized. Best practice in public finance calls for organizations with defined pension plans to have match their pension liablity amortization schedule with the time in which a public employee is expected to be providing active services to a community. When pensions are underfunded, the burden is more likely to fall onto the next generation of city taxpayers. That’s a big reason why an optimally appropriately funded pension program makes sense in the long term and poses the least stress to cities at the end of the day.
Although full pension funding is ideal, some caution is always advisable if the funding ratio is artificially propped up by mistaken actuarial assumptions, like the investment discount or mortality rates. So too, observers have to be careful of the use of pension bonds if they don’t provide strong assurance of a complete package to reduce the overall pension liablity. Pension bond necessarily relieve financial stress in the long run if they just shift the risk to bondholders since debt service is just as much of a future fixed cost burden as pension contributions, may even more so. Lastly, if a community covers its pension costs fully and underfunds essential service or infrastructure requirements, there are obvious potential negative implications sooner or later.