Morningstar Magazine - February/March 2014 - (Page 55)

unfunded pension burden at more than $18,000, which is more than five times the median. The city itself has been battling a high unfunded pension liability for many years, which currently stands at $19.4 billion or $7,149 per capita. Layering in the state's $94.6 billion unfunded liability, the aggregate unfunded liability for city residents increases to $14,570. Further complicating the issue, there are multiple overlapping jurisdictions. In addition to the state pension system, Chicago residents also contribute to the unfunded liability of Chicago Public Schools and Cook County. School systems are typically covered by a state pension plan, or in some cases, under local city or county plans, but Chicago schools are unique in that the majority of its pension benefits stem from a single-employer plan. The school system adds an additional $2,959 per capita to residents' aggregate pension burden. Cook County accounts for the remaining overlapping unfunded pension liabiliies. The state passed a sizeable pension reform package in December, which should help ease the state's portion of this burden going forward. Concerns in the Caribbean Puerto Rico has garnered headlines as the beleaguered state of its pension plans have drawn scrutiny. As Morningstar pointed out in its recent State of State Pensions report, the commonwealth's pension is abysmally funded. According to the 2012 actuarial valuations, Puerto Rico pension plans have an aggregate funded ratio of just 8.4% and a UAAL of $9,987 per capita. For a single entity, whether state or city, this is the highest UAAL per capita and the lowest funded ratio. However, due to the lack of overlapping jurisdictions, the aggregate per-capita burden remains below that of Chicago and comparable to New York City's. Puerto Rico passed pension reform in 2013, switching new members of its largest pension plan from a defined-benefit plan to a defined contribution. It also raised the retirement age, increased employer contributions, and lowered benefits for some public workers. The Big Apple's Big Number New York City's UAAL per capita for its pension plan was the highest among all cities surveyed in Morningstar's State of City Pensions report at more than $8,400. Since the release of the report, the pension burden has increased slightly with the release of the most recent actuarial report to $8,726. However, the state plan is well funded, adding just $1,100 to the aggregate per-capita liability. While the combined liability of $9,482 per capita is still high, it lies well below that of Chicago. Unfunded Pension Liabilities of U.S. Cities and Puerto Rico Parting Thoughts New York, however, isn't Detroit. Indeed, it is unclear whether any major municipality will follow in Detroit's footsteps. But Detroit's bankruptcy filing does have far-reaching implications on how pension liabilities and state protection of benefits are viewed in bankruptcy proceedings. To the extent Detroit regulators are successful in trimming these liabilities, other cash-strapped entities may look to emulate their actions. State Direct Pension UAAL Per Capita Total Pension UAAL Per Capita Washington DC -409 -409 Charlotte NC N/A 585 Memphis TN 317 893 Nashville TN 876 1,291 San Antonio TX 251 1,623 Seattle But New York's current financial status is a departure from previous years. When the actuarial valuation was released in 2011, New York City's pension system looked strong with an aggregate funding ratio of roughly 92% and an unfunded liability per capita just north of $1,100. The difference was largely driven by two changes in actuarial methods and assumptions: the actuarial cost method and the assumed interest rate. The interest rate is the most straightforward. It was decreased in 2012 to 7% from 8% due to recent market trends. We've seen this in many cases over recent years as plans are getting a handle on the impact from the recent recession. The actuarial cost method shifted from a frozen initial liability to the entry age method, which is the most commonly used amongst state and local plans. With the implementation of the new pension legislation in the coming years, only the entry age normal method will be allowed if entities wish to comply with Governmental Accounting Standards Board. City WA 1,837 1,997 El Paso TX 736 2,149 Fort Worth TX 986 2,377 Houston TX 1,196 2,622 Dallas TX 1,373 2,733 Austin TX 1,571 3,009 Phoenix AZ 1,649 3,351 Indianapolis IN 1,011 3,426 Jacksonville FL 2,586 3,675 Detroit MI 911 3,758 Denver CO 709 5,356 San Diego CA 1,642 5,973 San Jose CA 1,542 6,014 Los Angeles CA 1,895 6,426 San Francisco CA 2,866 6,453 Columbus OH N/A 6,814 Philadelphia PA 3,308 7,057 Boston MA 4,465 7,802 New York NY 8,726 9,842 Puerto Rico PR 9,987 9,987 IL 7,149 18,596 Chicago Median 3,550 Data as of December 2013. Pensions will play an integral role in determining an entity's fiscal health and credit quality. The UAAL per capita is a significant indicator as unfunded pension liabilities will be funded by residents. The aggregate liability shows the full burden for taxpayers in a particular entity. K Rachel Barkley is a municipal credit analyst with Morningstar. global.morningstar.com/Morningstarmagazine 55 http://global.morningstar.com/Morningstarmagazine

Table of Contents for the Digital Edition of Morningstar Magazine - February/March 2014

Morningstar Magazine - February/March 2014
Contents
Contributors
Letter From the Editor
Preparing for the Next 50 Years
Morningstar Managers of the Year
Fixing the Trust Deficit
Rethinking the Path to Retirement
Trends
Same Old, Same Old
Global Briefs
The Economic Implications of an Older World
Banking on Performance
Is the Affordable Care Act Healing Health Care’s Woes?70
Baxter Has a Positive Prognosis
Leading Fidelity’s Charge for RIAs
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
Moving the Goal Post

Morningstar Magazine - February/March 2014