Sept 26 The city of Chicago and a couple of nearby municipalities top the list of U.S. public pension burdens as measured by Moody's Investors Service's revised rating methodology.
Chicago, which Moody's downgraded to A3 in July because of pension concerns, is struggling under pension liabilities that were an outsized 678 percent of the city's operating revenues as of fiscal 2011, Moody's said in a report published on Thursday.
Cook County, Illinois, which Moody's downgraded to A1 in August, had unfunded pension obligations that were 382 percent of its revenues. The Chicago suburb has a median household income of about $54,600 and a population of about 5.2 million, making it the second-largest county in the United States behind Los Angeles County.
But the pain is shared among cities, counties and towns in pockets of financial distress across the United States. Denver County School District, in Colorado, has the third biggest adjusted pension liability in Moody's study, of 342 percent.
As the nation begins to grapple with growing retirement costs for state and city employees, Moody's has revamped the way it examines public pension liabilities to use tougher accounting measurements similar to those approved by the Governmental Accounting Standards Boards.
The rating agency applied that revised methodology to the pension burdens of the 50 cities, towns, counties and school districts with the most outstanding debt in the nation.
In June, the credit rating agency applied the revised methods to state retirement systems. But it came under some criticism for applying lower, corporate-style rates to public pensions, which typically use much longer time-horizons and higher investment return assumptions.
"Our goal is to have our ratings be comparable, whether we're talking about a municipality or a corporate rating," said Moody's analyst Tom Aaron. "We want to make sure that our measurements of liabilities are comparable across sectors."
Most municipalities tie their assumed rates of return on assets to the rates they use to discount liabilities in the future.
But Moody's methodology separates the two and arrives at lower discount rates than those usually used by the local governments themselves, which usually range between 7 percent and 8 percent.
Chicago, for example, reported an 8 percent discount rate that Moody's adjusted to 4.40 percent, its lowest rate for all 50 funds it examined.
The lower the rate, the bigger an unfunded liability appears and the more money a city might have to contribute to make up the shortfall.
New York City got Moody's highest adjusted discount rate, of 6.20 percent. The city also uses 8 percent for its own calculations. It ranked 28th on Moody's list of pension liabilities as a percentage of revenues.
Some funds were doing well by Moody's new measurements. Washington, D.C.'s adjusted net pension liability was just 11 percent of its revenues. Mecklenburg County in North Carolina was the second lowest, at 14 percent of revenues.
"It varies to such a large degree that you have to take a look at each individual case," said Moody's Aaron. "There's such a wide range of circumstances, where you have a city like Chicago, which has contributed less than its actuarial requirement for years, and the problem has continued to compound."
Rounding out the top five most problematic are Jacksonville, Florida, and the country's second-largest city, Los Angeles. Chicago's Metropolitan Water Reclamation District is also among the worst.
Jacksonville's high net pension liability arose not because of underfunding, but because of benefit accruals and poor asset performance, Moody's said.
Houston and Dallas in Texas ranked seventh and eight.
In April, Moody's identified 29 outliers among local governments with disconcerting pension liabilities. The credit rating agency has finished reviewing all of those, cutting its rating on 18 - including Chicago - and confirming the other 11.
Moody's is accepting comments on new proposed methodology for how it rates general obligation debt. It's planning to essentially double the weight it puts on outstanding debt, giving pension obligations equal footing with all other outstanding debt.
The comment period closes on Oct. 14.