WASHINGTON — Recent trends in the public pension arena "are not all gloom and doom," as most cities' pension funding ratios appear to have stabilized since the low point in 2010, Merritt Research Services said in a
"Although it is too early to say that the worst is over, positive market returns, along with a host of pension reforms, are producing some stabilization in the pension funding numbers for most cities," Merritt president and chief executive officer Richard Ciccarone wrote in the report, which was recently published onMuniNetGuide.com.
The median combined funding ratio for cities with at least one single-employer pension plan was about 75% for each of fiscal years 2011 through 2013. That figure is slightly higher than the 2010 median of 74%. However, the median funding ratio is still below the median ratio prior to the credit crisis, according to the report.
Merritt Research analyzed fiscal 2012 single-employer and agent pension reports from 1,112 cities and found that 15% of the cities had a "favorable" funding ratio of at least 90% of liabilities, 52% had ratios in the 70% to 89% range, and 15% had ratios in the 60% to 69% range. Only 15% of the cities were in "highly unsatisfactory funding condition," with funded ratios of less than 60%, the report said. The remaining 3% of the sample was comprised of cities with ratios of less than 60% and unfunded liabilities of less than $3 million.
"We have a significant amount of cities that are in more desperate condition and need to get their pensions fixed," Ciccarone said in an interview with The Bond Buyer.
People are likely to see cities with the weakest funding levels "in the headlines for some time to come," he said.
Many cities participate in cost-sharing multiemployer pension plans that are typically run by state agencies. Merritt found that in fiscal 2013, cities participating in multiemployer plans had median pension payments equal to 4.3% of their total governmental activities expenditures, while cities that are solely responsible for their plans had median payments of 5.3% of governmental activities expenditures.
The cities only in multiemployer plans that have payments well above the median are at risk for more serious budget squeeze, Ciccarone said.
"Market and public criticism that public pension discounts have been too high has led many governments to begin lowering them especially since the Great Recession," the report said. But the rates are only declining slightly, according to the report.
The Governmental Accounting Standards Board has adopted two new pension reporting statements. The statement for pension plans applies for fiscal years beginning after June 15, 2013 and the statement for governments applies for fiscal years beginning after June 30, 2014.
The standards include new rules for discount rates. Under those rules, when the actuarial study shows that a plan will become deficient in its ability to pay its workers and retirees, some unfunded liabilities will have to use a discount rate equivalent to a double-A or higher tax-exempt bond index. That type of index has been running at or below 4% recently, according to the report.
At first, it appeared that the new discount rate rules might lead to a relatively widespread initial drop in pension funding ratios. But evidence from governments that were early adopters of the new reporting requirements suggests that only a minority of plans will have to use the lower blended discount rate.
"More than likely, all other factors being equal, we expect that funding ratios for cities are more likely to improve for state and local pension plans as the 2014 and 2015 results are released as long as investment returns remain positive," Ciccarone wrote.
Merritt found that there is some correlation between funding ratios and cities' bond ratings, but the relationship between the two factors is weak for cities with ratings in the lower categories, according to the report.
