U.S. public pensions unhealthy

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

Melissa Shin is deputy editor of Advisor Group.

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.