Following American news channels might scare your clients who have pensions. (Fortunately, Canadian corporate and public pensions are doing well.)

Large defined-benefit pension obligations were factors in the 2012 bankruptcies of San Bernardino and Stockton, California. And in Detroit, Michigan, the city’s emergency manager wants to drastically cut pension benefits to pay other creditors.

More trouble’s coming. “The majority of state pension systems are coming under duress,” finds a 2013 Morningstar report, The State of State Pensions. And more than half of all states have pensions less than 70% funded.

That’s because in some cities and states, “annual pension contributions are not determined by actuarially determined contribution rates, but by legal statutes or political decisions.” As such, sponsors can legally fund lower benefit sums than the employees earned that year.

On a city level, just more than half of the largest 25 U.S. municipalities contributed the actuarial threshold of required funding for fiscal 2012, according to Morningstar’s The State of City Pensions 2013.

Morningstar says unhealthy pensions:

  • have high unfunded liabilities, both on percentage and per capita bases;
  • make contributions below actuarial thresholds;
  • rapidly increase their annual contributions; and
  • account for a significant portion of general government spending.

The problem isn’t uniform. Chicago’s pension is only 35% funded, while Washington, D.C.’s is 105% funded. Twelve states are at least 80% funded, “which is [the percentage] recommended by the Government Finance Officers Association,” the report says.

But “26 states and Puerto Rico fall below Morningstar’s fiscally sound threshold of 70%,” including Illinois, the worst-funded state, at 40%. Puerto Rico’s pension is only 11% funded.

Pension obligations for the 10 largest U.S. cities

Actuarial Assets Actuarial Accrued Liability UAAL Funded Ratio UAAL Per Capita City Contributions (2012) Annual Pension Contributions as % of Spending Net Outstanding Direct Debt
New York, NY $105,268,700 $175,116,000 $69,847,300 60.1% 8,472 $7,529,600 11.3% $77,318,459
Los Angeles, CA $24,186,873 $31,424,873 $7,238,000 77.0% 1,895 $630,133 14.3% $3,242,870
Chicago, IL $10,531,448 $29,883,531 $19,352,083 35.2% 7,149 $440,120 14.2% $7,939,682
Houston, TX $9,269,200 $11,836,600 $2,567,400 78.3% 1,196 $225,704 11.7% $3,513,299
Philadelphia, PA $4,716,793 $9,799,852 $5,083,059 48.1% 3,308 $539,500 15.5% $4,132,800
Phoenix, AZ $3,784,429 $6,207,954 $2,423,525 61.0% 1,649 $196,220 19.3% $2,321,945
San Antonio, TX $3,362,269 $3,700,138 $337,869 90.9% 248 $98,560 10.6% $1,940,298
San Diego, CA $4,739,399 $6,917,175 $2,177,776 68.5% 1,642 $232,847 20.0% $606,573
Dallas, TX $6,317,000 $7,997,000 $1,680,000 79.0% 1,373 $132,892 13.5% $1,600,107
San Jose, CA $4,474,381 $5,966,234 $1,491,853 75.0% 1,542 $208,091 29.7% $1,284,371

Melissa Shin is deputy editor of Advisor Group.

Originally published in Advisor's Edge Report

Read this article and full issues on the iPad - click here.

Add a comment

You must be logged in to comment.

Register on Advisor.ca