U.S. Markets

Spending on fixed costs rise for largest U.S. cities: S&P

The skyline of downtown Manhattan is seen from Liberty State Park in New Jersey, U.S., June 6, 2018. REUTERS/Andrew Kelly

NEW YORK (Reuters) - Some of the largest U.S. cities spent more on pension payments and other fixed costs in fiscal 2017 than the year before, and those expenses are likely to continue to weigh on budgets, according to an annual report released by S&P Global Ratings on Wednesday.

On average, for the largest 15 cities in the country, public employee pensions, debt and other retirement benefits made up 26 percent of expenditures compared with 25 percent in fiscal 2016, S&P said in its report.

In order - from high to low - of fixed costs as a percentage of expenditures, the cities surveyed were Chicago, Dallas, Jacksonville, San Jose, Houston, Austin, Phoenix, New York, Columbus, San Francisco, San Antonio, Los Angeles, Indianapolis, San Diego and Philadelphia.

For 11 of the cities surveyed, the financial burden of pensions was greater than debt obligations, S&P said.

Across all pension plans in the survey, the median funded ratio was 69 percent, S&P said. Chicago was an outlier at only 26 percent funded, the report said.

“We expect those cities with poorly funded pensions to continue to see steady growth in fixed costs over time, likely pressuring or crowding out other budget priorities and leading to a diminished capacity for weathering stress scenarios,” the report said.

Funding ratios for pensions have remained mostly flat over the past three years despite strong investments in the funds in fiscal 2017, S&P said. That, in part, is due to multiple cities revising their assumed investment rate of return lower, it said.

The median assumed investment rate of return across the largest cities was 7.25 percent in fiscal 2017 compared to 7.5 percent two years prior, S&P said.

Reporting by Laila Kearney; editing by Diane Craft