Pew study finds dismal funded status for most U.S. city pension plans

A new analysis by the Pew Center on the States found an average pension funding level of 74% in fiscal 2009 and a shortfall of a combined $99 billion among 61 key U.S. cities.

Still, it is not necessary to be “too pessimistic,” David Draine, Washington-based Pew senior researcher, said in an interview. “Obviously, the recession is the big story (in the funding shortfall), but the point is not to look at that one-time loss. Ultimately, this is a solvable problem, but only if policymakers make some of the tough choices.”

The Pew study — the center's first focusing on cities —highlights a big difference in how cities fund their pension obligations. In the 35 cities that made at least 90% of annual recommended contributions to their retirement systems, funding levels dropped by only 4% by 2009, while plans making less than 90% of their contributions dipped an average of 9%.

Pew researchers were limited to 2009 for complete data on all 61 cities, which represent nearly half of all municipal employees in the U.S.

Based on two criteria — funding levels of at least 80% as of 2009 and annual contributions of at least 90% of the contribution — 16 cities “managed to avoid the worst (underfunding), and they did so by exercising fiscal discipline,” Barbara Rosewicz, Pew director of research and information, said during a conference call about the report.

Some even had pension surpluses at the end of their 2009 fiscal year, including the $4.2 billion City of Milwaukee Employes' Retirement System, which was 113% funded.

“We pay our bills on time, and we're good about making sure we have a balanced budget,” said Alderman Michael Murphy, who chairs the pension board's investment committee and the Common Council's finance committee. “We've had good returns, but the council has been very responsible about resisting the pressure (to increase benefits or reduce contributions). We've said no,” Mr. Murphy said in an interview.

For the $1.65 billion Denver Employees Retirement Plan, which was 87% funded in at the end of its 2009 fiscal year, it's about “always making” the annual recommended contribution, said Rich Harris, finance and compliance officer. “Pension plans have to do three things in order to remain sustainable: manage their assets; manage their liabilities; and collect their ARC. It's really as simple as that. Everybody manages their assets; it's the other two things that can get you in trouble,” said Mr. Harris, who concedes “it takes great discipline” to not promise more benefits or reduce contributions when there is a pension surplus.

Nine cities were consistently underfunded, and four of them — Charleston, W.Va.; Omaha, Neb.; Portland, Ore.; and Providence, R.I. — fell to 50% funded or lower by the end of their 2009 fiscal years. For those cities, “the real issue is failure to make their contributions, or they laid on extra benefits, or they took on extra (investment) risks that they couldn't handle,” said Mr. Draine.

Charleston had the worst funding ratio — 24%. There, state officials increased benefits through the years, but denied the city the right to raise revenues to pay for the benefit hikes. Also during the 1990s, the state limited the amount of equity investing by police and fire pension funds, while allowing cities to tap those funds to pay for underfunded teacher pensions. West Virginia also allowed cities to contribute less than annual recommended amounts, Pew said.

Among the 40 cities where fiscal 2010 data were available, there was an even wider funding gap, with unfunded pension liabilities rising another 15%. Mr. Draine does not expect that trend to change until smoothing periods to absorb losses from the recession end, beginning this year or in 2014.

“It will not be surprising at all to see further drops. The numbers we are showing don't include the full impact of the recession,” he said.

By contrast, Boise, Idaho, which didn't use smoothing methods but rather acknowledged 2008 investment losses all at once, saw its funding level drop to 74% at the end of fiscal 2009 from 105% in 2007, but bounced back to 90% by 2011, according to Mr. Draine.

The Pew report “may provide a valuable history lesson, but it cannot yield a realistic representation of the status of municipal pension plans today,” said Hank Kim, executive director of the National Conference on Public Employee Retirement Systems, Washington.

A study of 2011 data by NCPERS and Cobalt Community Research of 147 public pension funds, including 123 municipal funds found an average funding level of 74.9%, he said. Also, it showed recent improvement on longer-term investments of three to 10 years, which Mr. Kim said was “a very good sign for any organization that pays off its liabilities over an extended period of time.”

Jordan Marks, executive director of the Washington-based National Public Pension Coalition, whose member organizations represent public sector employees, worries about how the study results and calls for benefit reforms will be used.

“The bottom line is our politicians repeatedly broke promises by failing to contribute the required amounts to workers' pension plans, and then raided those funds for other purposes,” Mr. Marks said in an e-mailed response to a request for comment.

Some of the tough choices cities with underfunded pension funds should consider, the Pew report noted, include raising more revenue to fund the pension plan, cutting spending in other areas to free up money for the pension fund, increasing employees' contributions and cutting benefits — or some combination of all of those.

“There is more attention being paid (to pension funding issues), and these (steps) have the potential to turn things around,” said Mr. Draine. “The two messages are fix the problem you are already in and make sure you don't get into the same situation.” n