Is Your CITY OUT OF MONEY, FACING INSOLVENCY ?
Transcript of Is Your CITY OUT OF MONEY, FACING INSOLVENCY ?
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TheCrisisinLocalGovernmentPensionsintheUnitedStates*
ROBERTNOVYMARX,UNIVERSITYOFROCHESTERANDNBER
JOSHUARAUH,KELLOGGSCHOOLOFMANAGEMENTANDNBER
October2010
RevisedOctober
13,
2010
Abstract
WecalculatethepresentvalueoflocalgovernmentemployeepensionliabilitiesasofJune2009for
approximately2/3rdsoftheuniverseoflocalgovernmentemployees.Usinglocalgovernmentaccounting
methods,thetotalunfundedliabilityintheseareasis$190billionorover$7,000permunicipal
household.Whengovernmentaccountingiscorrectedbydiscountingalreadypromisedbenefitsatzero
coupon
Treasury
yields,
the
total
unfunded
obligation
is
$383
billion
or
over
$14,000
per
local
household.Ifonapermemberbasistheunfundedliabilityisthesameforthe1/3rdofworkerscovered
bymunicipalplansnotinoursample,thetotalunfundedliabilityforallmunicipalplansintheU.S.is
$574billion.Thisunfundedpromiseisaboveandbeyondtheroughly$3trillion(oralmost$27,000per
household)unfundedliabilityofallstatesponsoredpensionplansintheU.S.ManyU.S.citiesare
thereforecarryingsubstantialoffbalancesheetdebtintheformofunfundedpensionobligations.We
alsoidentify6majormunicipalitieswhosecurrentpensionassetswouldonlybesufficienttopay
alreadypromisedbenefitsthrough2020,and20whosecurrentpensionassetswouldonlybesufficient
topayalreadypromisedbenefitsthrough2025.
*NovyMarxisAssistantProfessorofFinanceattheSimonGraduateSchoolofBusiness,UniversityofRochester.
JoshuaRauhisAssociateProfessorofFinanceattheKelloggSchoolofManagement,NorthwesternUniversity.
PreparedfortheBrookingsNomuraWhartonConferenceGrowingOld:PayingforRetirementandInstitutional
MoneyManagementaftertheFinancialCrisis.WethankSuzanneChangandKevinSoterforresearchassistance.
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Introduction
Stateandlocalgovernmentsfollowthesameaccountingframeworkformeasuringthevalueof
theirpensionpromises.ThestatementthatgovernstheirdisclosuresisGovernmentAccounting
StandardsBoard(GASB)statement25,whichstipulatesthatbenefitpromisesaretobediscountedatan
assumedreturnonpensionplanassets.Thisassumedreturndetermineshowthefuturestreamofcash
benefitsthatthestateorlocalgovernmenthaspromisedgetsconvertedintoapresentvalueliability
measure.Italsogovernstheactuarialrecommendationfortheannualamountthatstateandlocal
governmentssetasidetofundnewlypromisedbenefits.Thehighertheassumedreturn,thelowerthe
presentvalueofrecognizedbenefitcashflows,andthelessmoneythegovernmententitysetsasideon
aflowbasistocoveragivenbenefitstream.
Aswehavepointedoutbefore(NovyMarxandRauh(2009,2010a,2010b)),thissystem
misrepresentsthevalueofpensionpromises.Thefieldoffinancialeconomicsisunifiedontheconcept
thatthepresentvalueofastreamofcashflowsisafunctionoftheriskofthecashflowsthemselves.
Thevalueofaliabilitythereforedependsontheriskofthestreamofcashflowsassociatedwiththat
liability,
not
on
the
assets
that
back
the
liability.
IfhouseholdscouldusetheGASBaccountingsystem,thentheycouldwritedownthevalueof
theirmortgagesbysimplyreallocatingtheirsavingsfromamoneymarketaccounttoaninvestmentin
thestockmarket.Bydoingso,theywouldincreasetheexpectedrateofreturnontheirassets,andget
tousethishigherratetodiscounttheirdebts.Ifstateandlocalgovernmentstookfurtheradvantageof
thissystem,theycouldmaketheirliabilitiesessentiallydisappearbytakingonriskyinvestmentswith
highaverage
returns
and
high
risk.
Inpreviousworkwehaveshownthatthetotalliabilityforthemajorpensionplanssponsoredby
the50U.S.stategovernmentsisapproximately$5trillionusingTreasurydiscountrates,contraryto
governmentaccountingwhichwouldpointtototalliabilitiesofonly$3trillion.Theunfundedliabilityfor
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themajorpensionplanssponsoredbythe50U.S.stategovernmentsisapproximately$3trillionusing
Treasurydiscountrates,contrarytogovernmentaccountingwhichwouldpointtounfundedliabilitiesof
only$1trillion.
Inthispaper,weexaminemunicipalpensionpromises.Inparticular,weapplyfinancialvaluation
to77pensionplanssponsoredby50majorcitiesandcounties.Thissamplerepresentsallnonstate
municipalentitieswithmorethan$1billioninpensionassets,covering2.04millionlocalpublic
employeesandretirees.AccordingtotheU.S.CensusofGovernments,thereareatotalof3.03million
individualscoveredby2,332localpensionplansintheUnitedStates.1Thus,whilewecaptureonly3%of
municipalpensionplans,wecaptureabout2/3rdoftheuniverseofmunicipalworkers.
Accordingtothelatestreportsissuedbythegovernmentsthemselves,thesemunicipalitieshave
$488billioninliabilities.Whenwereverseengineerthecashflowsandlimittherecognitiontoonly
thosebenefitsthathavebeenpromisedbasedontodaysserviceandsalary,thisfiguredropsto$430
billion.WhenweusetaxableAA+municipalyieldcurvestodiscountthem,weobtainliabilitymeasures
thatarearound18%larger.WhenweusetheTreasuryyieldcurve,wefindatotalliabilityof$681
billion,
which
is
39%
above
the
stated
level
and
58%
above
the
already
promised
benefit
at
municipally
chosenrates.Netoftheassetsintheplans,theunfundedliabilityis$383billionusingTreasury
discounting,orover$5,300percapitaandover$185,000permember.Ifonapermemberbasisthe
unfundedliabilityisthesamefortheapproximately1millionlocalworkerscoveredbymunicipalplans
notinoursample,thetotalunfundedliabilityforallmunicipalplansintheU.S.wouldbe$574billion.
Themunidiscountingmethodcreditscitiesthatexperienceratingsdowngradeswithlower
liabilities.If
local
taxpayers
could
default,
or
put
the
responsibility
to
pay
pensions
back
to
some
other
entity,inthesamestatesoftheworldascitymunicipaldefaults,thenmunidiscountingwouldrepresent
1Seethe2008surveyofState&LocalGovernmentEmployeeRetirementSystems:
http://www2.census.gov/govs/retire/2008ret05a.xls.
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theirexposure.However,giventhelegalprotectionsthatexistforstateandlocalgovernmentpensions
inmanystatesaswellasthepoliticalrealitythatinpastmunicipalcrisesthepensionshavebeenpaid
whilethelocalitiesbondshavebeenimpairedabettermeasureofoveralltaxpayerliabilityisobtained
bytreatingaccruedpensionbenefitsasadefaultfreepromiseanddiscountingusingTreasuryyields.
Forthestates,implementingTreasurydiscountratesincreasestotalliabilitiesbyaround66%,
whereasinthemunicipalitieswestudytheimpactissomewhatsmallerat39%.Thisreflectsthefactthat
theretiredmembershareinthemunicipalplansaverages43%,whiletheretiredmembershareinthe
stateplansaveragesonly36%.Asaresult,themunicipalplanshaveshorterdurationthanthestate
plansandarelessaffectedbythecorrectionofthediscountrates.
The$0.6trillionunfundedliabilityinmajormunicipalitiesobviouslyismuchsmallerthana$3
trillionunfundedliabilityforstategovernments.Relativetothemunicipalitiesresourcesandtaxes,
however,theunfundedliabilityislarge.The50municipalitieswiththe$382billionunfundedliability
thatwemeasurehad2006revenuesof$120billion.Theunfundedliabilityisthereforeequivalentto3.2
fullyearsofrevenue.Forthecomparabletimeperiod,the116statesponsoredplanshada$2.52trillion
unfunded
liability
and
$0.78
trillion
in
revenues,
for
a
ratio
of
3.2
full
years
of
revenue.
Thus,
relative
to
thepublicentityscurrenttaxresources,theextentofthegapbetweenassetsandliabilitiesinthe
municipalisalmostexactlythesameasinstateplans.
Thispaperproceedsasfollows.InSection1wepresentthesampleandourcalculationsof
municipalpensionliabilitiesundercurrentreporting.InSection2wereviewthedifferentmethodsof
recognizingaccrualsandtheargumentsaboutappropriatediscountrates.Section3presentsourmodel
fortranslating
among
liability
concepts
and
for
calculating
municipal
pension
liabilities
using
different
yieldcurves.InSection4wedescribethepresentvaluecalculationsunderalternativeyieldcurves.In
Section5wecalculatethenumberofyearsthattheexistingassetsofeachmunicipalitycouldpay
benefitsatcurrentlypromisedlevels.Section6summarizesandconcludes.
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1.SampleandMunicipalPensionObligationsUnderCurrentReporting
Thesampleconsistsof77definedbenefitpensionsystemssponsoredbylocalgovernments.The
samplewasidentifiedusingthedetailed2006datafromtheU.S.CensusofGovernments.Wefirst
selectedallplanswithmorethan$1billionofassetsasof2006,thelatestyearforwhichthedetailed
censusofstateandlocalgovernmentretirementsystemswasavailable.Thisamountedto78plans.We
thenaddedanyotherplanssponsoredbythesamelocalgovernmententitieswithatleast$100million
inassets,yieldingatotalof90plans,soastoensurethatforanyofthemunicipalitiesinoursample,all
substantivepensionplanswouldbecounted.2Wethenconstructedauniquedatasetbysearchingthe
localgovernmentwebsitesfortheComprehensiveAnnualFinancialReports(CAFRs)oftheseplans.Due
todataavailabilityissues,wewerealsoforcedtodiscardtheplansfromseveralmajormunicipalities
includingDenver(CO),Austin(TX)andMinneapolis(MN).Thefinalsampleis77pensionsystemsin50
majormunicipalities.
Table1presentssummarystatisticsonthemembershipofthese77systems,aswellas
membershipdataforthelargest10plansbytotalmembership.Thereare2.04millionworkersinthese
plans,
compared
to
3.03
million
total
workers
covered
by
local
government
pension
plans
in
the
U.S.
CensusofGovernments.Onaverage,53%oftheworkersinthesampleplansarecurrentemployees.
Systemsthathavealargershareofactiveworkerswillfacelargerbenefitcashflowsfurtherinthe
futureandthedurationoftheircashflowswillbelonger.
EachmunicipalityreportsameasureoftotalliabilitiesintheCAFR.Astartingpointfortotal
liabilitieswouldbesimplytotakearawsumofliabilitiesfromthesereports,whichyieldsatotalof$464
billion.However,
the
date
of
the
latest
available
CAFR
is
not
the
same
for
each
system,
so
the
liabilities
2Therewere277totalplanswithmorethan$100millioninassetsasof2006.
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mustbeharmonizedtoaJune2009reportingdate.3Assuminga6%benefitgrowthrate(whichactually
isconservativerelativetotheratethatstatedbenefitshavebeengrowing),wearriveattotalliabilities
of$488billionasofJune2009onastatedbasis.
Rediscountingofcashflowsunderdifferentactuarialaccrualconceptsanddifferentyield
curvesrequiresanestimateofthecashflowsthemselves.Unfortunately,thelocalgovernmentsdonot
providethecashflowsthattheyusetoderivetheliabilitiesthattheyreport.Toderiveestimatesofcash
flowstreamsbasedontheinformationprovidedintheCAFRsthereforerequiresacalibratedmodeland
aseriesofassumptions.Weexplainthecalibrationitselfinsection3.
2.AccrualMethodsandDiscountRates
Mostestimatesofliabilitiesthatarenotconductedbyeconomistssimplyadduptheliabilities
thataredisclosedintheCAFRs.Thismethodignorestwoissues.First,itreliesstrictlyontheliability
conceptthatstateactuarieschoosewithoutaconsiderationofwhatliabilitiesareactuallybeing
recognized.Second,addingliabilitiesdisclosedintheCAFRstakesasgivenwhateverdiscountratethe
stateactuarieshavechosen.
A.Liability
Concepts
Therearefourdifferentliabilityconceptsthatweconsider:AccumulatedBenefitObligation
(ABO),ProjectedBenefitObligation(PBO),EntryAgeNormal(EAN),andProjectedValueofBenefits
(PVB).Webeginthissectionbydescribingtheseconcepts.
ThenarrowestmeasureistheABO.Itreflectsbenefitsalreadypromisedandaccrued.Inother
words,evenifthepensionplanscouldbecompletelyfrozen,acitywouldstillcontractuallyowethese
benefits.The
ABO
is
not
affected
by
uncertainty
about
future
wages
and
service,
as
the
cash
flows
3Thedistributionoflatestreportingdatesisasfollows:June2007(1),September2007(1),December2007(3),
June2008(23),September2008(5),December2008(17),June2009(22),September2009(2),December2009
(3).
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associatedwiththeABOarebasedoninformationknowntoday:planbenefitformulas,currentsalaries
andcurrentyearsofservice.OnesourceofuncertaintyintheABOisinflation,andinparticularthe
magnitudeofCOLAadjustmentsincitieswhereCOLAsarelinkedtoofficialstatisticssuchasCPI
inflation.
TheABOisoftenthoughtofasaterminationliability,i.e.theliabilitythatwouldbeowed
todayevenifplanswerefrozencompletelyorallworkerswerefired.Infact,theABOactuallycouldbe
somewhatlessthanaterminationliability,asitassumesanemployeedoesnotstarttakingbenefits
untilhisretirementdate,whichmightbelaterthanthefullretirementage.Aterminationliability
assumesthatemployeeswilltakebenefitsattheearliestadvantageousdate,whichtypicallywillbe
earlierthanthefullretirementagegiventhefactthatactuarialadjustmentsforearlyretirementare
generallylessthanactuariallyfair.
Ifworkersreceivetheirmarginalproductintotalcompensation(wagespluspensionbenefits),
theABOistheonlyconceptthatshouldbeconsideredsinceitmeasuresthebenefitsthatemployees
haveactuallyearned(Bulow(1982),BrownandWilcox(2009)).TheABOisanarrowmeasureinthatit
does
not
recognize
any
future
wage
increases
or
future
service
that
employees
are
expected
to
provide,
eventhoughsuchwageincreasesandservicearetosomeextentpredictable.Moreover,theABO
obligationisindependentofwagerisk,whichsimplifiesthevaluation.
Thethreebroadermeasures(PBO,EAN,andPVB)allaccounttovaryingextentsforthefactthat
benefitswillcontinuetoaccrueduetothefuturesalaryand/orserviceofexistingworkers.Theyassume
thatthepensionsystemwillnotbefrozentodayandallaimtoreflectsomeportionofactualexpected
benefits.
Thebroadestmeasure,thePVB,representsadiscountedpresentvalueofthefullprojectionof
thecashflowsactuariesexpectthecitytoowe.ThePVBmethoddoesnotcreditthegovernmentforthe
factthatitmighthavesomeabilitytolimitbenefitaccruals.BoththeEANandthePBOrecognizea
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expectedrateofreturnontheassetsintheirpensionfund.Suchaprocedureignorestheriskofthe
assetscompletelyandtreatsreturnsabovetheriskfreerateasafreelunch.
TheGASBprocedureshavesurvivedcriticisminpartbecauseobservershavenotedthatmany
pensionsystemshaveearnedaveragereturnsofaround8%overthepastdecades.Butagain,this
assumesthatthe8%wasobtainedwithoutanyrisk.Infact,thesereturnswereobtainedbytaking
investmentrisk,andiftheassetshadnotreturned8%,taxpayerswouldhavebeenonthehookfor
additionalshortfalls.Ifsystemswanttobeabletotelltheiremployeesthatthebenefitstreamissafer
thanaportfolioofstocksandbonds,theyshoulddiscountthecashflowsinawaythatreflectsthat
safety.
NovyMarxandRauh(2010a)employtwoprimarydiscountingprocedures.Thefirstusesthe
taxablemunirate,definedasthelocalmunicipalyieldgrossedupforataxpreferenceonmunidebt,
assuminga25%marginalrateforthemarginalmunicipalbondholder(PoterbaandVerdugo(2008)).
ThesecondmethodusestheTreasuryyieldcurve.
Usingthemunirateadmitsandquantifiesaprobabilityofdefault.Theliabilityisameasurethat
calculates
the
present
value
of
this
defaultable
liability
from
the
perspective
of
the
taxpayers
under
the
assumptionthatthemunicipalitieswilldefaultonthesepaymentsinthesamestatesoftheworldason
theirgeneralobligationdebtandwiththesamerecoveryrates.Alternatively,itisthevalueofthe
portfoliooflocalGObondsthemunicipalitieswouldneedtodelivertotheplantodefeasethe
obligation.Whenassessingthedifferenceintheliabilityunderdifferentpolicymeasures,the
comparativestaticsquantifyhowbigtheshiftisinthevalueoftheseuncertainpayments
Discountingaliability
at
the
taxable
muni
rate
captures
some
of
the
spirit
of
the
FASB
rules
for
corporatepensiondiscounting.TheFASBruleletscorporationsdiscountpensionobligationsathigh
gradecorporatebondrates.Discountinglocalpensionobligationsatmunicipalbondratesbears
similarityinthatthecreditworthinessoftheassetclass(municipalorcorporatebonds)playsarole.In
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thispaper,weassumethattheAA+yieldcurvewouldbeappropriateforallmunicipalitiesunderthis
procedure.4
CreditinggovernmentsbyreducingpensionliabilitiesbasedonGOdefaultpremiumsleadsif
anythingtoanunderstatementoftheliabilitytothetaxpayer.Mostimportantly,benefitsareoften
givenspecialprotectionsinstateconstitutionsaswellasthroughstatutoryandcommonlaw(Brownand
Wilcox(2009)).Thepriorityaccordedtopublicpensioncashflowssuggeststhattheyshouldbe
discountedatrateslowerthantheGObondyield.Inmostlocalgovernmentsituations,apension
defaultislesslikelythanaGOdebtdefault(considerVallejo,CA).Evenifcitiesweretodefaulton
pensionpromises,pensionobligationsmightwellhaveahigherrecoveryratethanGOdebt.Somewhat
offsettingthisisthepossibilitythatmunicipalitiesmightreceiveabailoutfromstateorfederal
governmentforthesepensionpromises(considerHarrisburg,PAforexample),inwhichcasetaxpayers
ofagivencitymightviewthepensionliabilitiesaslesscertainlyowedbythem.However,becauseour
focusisonanaggregateliabilitycalculationacrossmunicipalities,thisissuewouldaffectthedistribution
ofliabilitiesacrosscitiesandstatesbutnotthetotalliabilitytoallUStaxpayers.
Using
the
Treasury
yield
curve
values
the
pension
benefits
as
secure
promises.
The
Treasury
valuationsbeginfromthepremisethatthebenefitswillbepaid.Totheextentthattheyarenotpaid,
thereisatransferfromparticipantstotaxpayers.Theexpectedvalueofthesetransferswouldreduce
thevalueofthepaymentstotheparticipantsbutalsoreducethecosttothetaxpayer.TheTreasury
discountingcanthereforebeviewedasvaluingthebenefitsasadefaultfreepromise.Iflocalpension
systemswanttopresenttotheiremployeestheideathatthebenefitsaredefaultfree,theymust
4Therearesomeadditionalimportantdifferences.First,FASBrulesrequirefirmstorecognizethePBO,whereas
ourprimaryfocusisontheABO.Second,afirmwillowelittlebeyondtheassetsinthepensionfundifthefirm
becomesinsolvent,sincethePBGCwilltakeovertheplanandbecomeanunsecuredcreditorinbankruptcy.States
arenotinsuredbythePBGC,andevenifthestatedefaultsonitsdebt,thereisahighlikelihoodthatitwillhaveto
paypensions.
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discountatdefaultfreerates.Ifalocalpensionsystemwantedtocontractouttheprovisionofthe
benefitstoaninsurerwhowouldmakethebenefitpaymentsevenifthemunicipalityinthefuture
defaultedonsomeofitsobligations,theinsurancecompanywouldpresumablyvaluetheliabilityata
defaultfreerate.
ThereareimportantcaveatsaboutusingtheTreasuryyieldcurveasameasureofriskina
defaultfreepensionliability.AlthoughtheTreasuryyieldcurveisgenerallyviewedasdefaultfree,it
reflectsotherrisksthatmaynotbepresentinthepensionliability.Stateemployeepensionstypically
containCOLAs.Ifinflationriskispriced(Fisher(1975),Barro(1976)),thenanappropriatedefaultfree
pensiondiscountratewouldinvolveadownwardadjustmentofnominalyieldstoremovetheinflation
riskpremium.ThisadjustmentwouldfurtherincreasethepresentvalueofABOliabilities.However,a
countervailingfactoristhefactthatTreasuriestradeatapremiumduetotheirliquidity(Woodford
(1990),DuffieandSingleton(1997),Longstaff(2004),KrishnamurthyandVissingJorgensen(2008)).
PensionobligationsarenowherenearasliquidasTreasuries.Thereforealiquiditypricepremiumshould
ideallyberemovedfromTreasuryratesbeforeusingthemtodiscountdefaultfreebutilliquid
obligations.
Giventhelackofconsensusovertherelativesizeoftheliquiditypricepremiumandinflation
yieldpremium,weuseunadjustedTreasuryratestocalculateourdefaultfreeliabilitymeasures.
However,wenotethatduetothesefactorspricedintotheTreasurycurve,defaultfreepublicpension
obligationsarenotequivalenttoTreasuries.5
3.CalculatingLiabilitiesUnderDifferentAccrualConceptsandDiscountRates
5NovyMarxandRauh(2010a)alsonotethatifwagesarecorrelatedwiththestockmarketoverlonghorizons,
somecorrectionforthatcorrelationmightbeusefulinthediscountfactor,butonlyforthebroadermeasures.The
ABOisindependentoffuturewagegrowth.
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NovyMarxandRauh(2010a),whichconsidersstateplans,providesadetailedaccountofour
methodology.Thebasicchallengeisthatplansarediscountingcashflowsusingasimplediscounted
cashflowformula:
However,plansdonotreportthecashflows(Ci,t),whichappearinthenumerator.
Ourmodeldeliversaforecastofeachplan'scashfloweachyearinthefutureunderthe
differentaccrualconcepts.Themodelusesplanlevelinformationregardingthenumberofactive,
retiredandseparatedworkers,aswellasthebenefitfactor(i.e.,thefractionofsalarywhich,when
multipliedbyyearsofservice,determinesaparticipant'sinitialbenefit),costoflivingadjustment(COLA)
andinflationassumptionemployedbytheplan.WecollectthisinformationindividuallyfromtheCAFRs.
Thecalculationalsoemploysassumptionsregardingtherelativenumberofemployeesandaverage
wagesbyageandyearsofservice(anageservicematrix),aswellassalarygrowthandseparation
probabilitiesbyage,andtherelativenumberandaveragelevelofbenefitsforannuitantsofeachage.
The
benefit
calculations
assume
a
full
retirement
age
of
60,
and
that
younger
retirees
can
start
takingbenefitsuptofiveyearsearlybyincurringalinear6%benefitreductionforeachyeara
participantretiresbeforeage60.Thecalculationalsorequirestheaveragesalaryoftheworking,which
weestimateas$65,182in2009.
BenefitsareprojectedassumingmortalityratesfromtheRP2000tables,whichareemployed
bymanystateandlocalgovernments.Weusethetables'combined(employee/retired)healthyrates,
andassume
that
participants
are
evenly
divided
by
gender,
that
60
percent
are
married
at
the
time
they
retiretoaspouseofthesameage,andthatplansallowfor50percentsurvivorbenefits.
Wethencalibrateeachplan'scashflowsbyadjustingtheaveragesalaryleveloftheemployed
andtheaveragebenefitsofthenonactivemembers.Theyarecalibratedtosimultaneouslymatchboth
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1.)theplansstatedaccountingliabilitywhencapitalizedatthecitychosendiscountrateusingthe
actuarialmethodemployedbythemunicipality;and2.)theplansexpectedfirstyearcashflow,which
weestimateat107%ofthecashflowfortheyearendingJune2009,basedonrecenthistoricalcash
flowgrowth.
Someofthesecalculationsrequireadditionaldata,whichweexplainhere,reflecting
assumptionsaboutsalaries,yearsofservice,andwages.,Inparticular,weneedthedistributionofplan
participantsbyageandyearsofservice(anageservicematrix),andtheaveragewagesofemployees
ineachcell.Forthispurposeweusetherepresentativeaverageageservicematrixofpublicplansused
inNovyMarxandRauh(2010a).6Wealsorequiresalarygrowthandseparationprobabilities,byage,for
activeworkers,vectorsthatalsocomefromNovyMarxandRauh(2010a).
Forretiredworkers,weemployadistributionofretireesbyageandtheaverageannuitybenefit
ineachagecategory.Thisinformationisonlysporadicallydisclosed,butbysamplingthelocalCAFRswe
obtainedanaveragedistributionacross17planscovering274,063millionoutofthe808,214annuitants
inoursampleplans.Table4showstheaveragefractionofretireesandaverageannuityineachage
group,
and
the
note
to
Table
4
lists
the
plans
from
which
this
distribution
was
derived.
Over
40%
of
the
retireesareunderage65.Theaverageannuityishighestfor5559yearoldsatover$38,000,andlowest
fortheoldestretireeswhopresumablyretiredunderlessgenerousbenefitregimes.Theoverallaverage
annuityis$30,000.
ThetotalcashflowsdeliveredbythemodelareillustratedinFigure1.Discountingthedashed
line(EAN)inFigure1at8%byconstructionwillyieldanumberveryclosetothestatedliability(theonly
differencebeing
that
afew
plans
use
amethod
different
from
the
EAN).
The
solid
line
shows
what
6Thismatrixwasbasedonselectingthe10stateswiththelargesttotalliabilitiesandthensearchingtheCAFRsfor
ageservicematrices.TheageservicematriceswereavailableforNewYork,Illinois,Pennsylvania,Ohio,andTexas.
Whilethisistheageservicematrixforworkersinstatesponsoredplans,weexpecttheageserviceprofileoflocal
planstobesimilar.
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wouldhappentototalcashflowsacrossthe77municipalitiesiftheplanswereallfrozentoday.The
benefitswouldpeakataround$42billionannuallyin2025.Ifplansarenotfrozen,however,thetopline
isthebestestimateofwhatactualbenefitswillbe,peakingatover$70billionaroundtheyear2040.
Thispeakoccursslightlylaterthanthatcalculatedforstatedefinedbenefitpensionplanscalculatedin
NovyMarxandRauh(2010a),primarilybecauseretiredmunicipalworkersareyoungerthanretired
stateworkers.7
Figure2breaksthesedownintocashflowsowedtocurrentlyactiveemployees(topgraph),the
currentlyretired(bottomgraph)andtheremainder,whoareneithercurrentlyinpublicemployment
nordrawingapensionbutareentitledtodrawapensionatsomefuturedate.Theliabilitydueto
currentannuitantsandseparatedworkersisinsensitivetotheaccrualmethod,sincetheaccrualmethod
isaquestionofhowtotreatfuturewagegrowthservicebytheemployeeswhoarecurrentlyinactive
employment.
4.ThePresentValueofPensionPromises
Figure3showsthealternativediscountratesthatweapply.Thisgraphshowszerocouponyield
curves
for
Treasuries,
as
well
as
AA+
municipal
bonds
as
of
30
June
2009.
Yields
on
coupon
bonds
were
collectedfromBloomberg.Thezerocouponyieldswerecalculatedfromstripprices,whichweobtained
byconstructinglongshortportfoliosofthecouponbonds.
Table5showsthepresentvalueofmunicipalliabilitiesunderthedifferentmethods.Thefirst
cellintheupperleftrepresentstherawsumofliabilitiesonanasreportedbasisharmonizedtoJune
2009.Asexplainedpreviously,thisstartingpointfortheliabilityis$488billion.
Theother
figures
in
the
left
column
of
the
table
show
the
sensitivity
of
the
liability
to
the
use
of
differentaccrualmethodswhileretainingthemunicipallychosendiscountrate.Movingfromthe
7Forexample,inoursample11%ofretiredmunicipalworkersareunder55,comparedto3.5%ofretiredstate
workersinNovyMarxandRauh(2010a).
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municipallychosenmethod,whichisusuallyEAN,toanABOreducestheliabilityto$430billion.Moving
totheexpansivePVBresultsinaliabilityof$581billion.Thelowerpaneloftheleftcolumndecomposes
thetotalintothememberstatusasof2009,wherethecategoriesareactiveparticipants,annuitants,
andseparated(nolongercityemployed)participantsnotyetdrawingbenefits.Again,theliabilitydueto
currentannuitantsandseparatedworkersisinsensitivetotheaccrualmethod,sincetheaccrualmethod
isaquestionofhowtotreatfuturewagegrowthservicebytheemployeeswhoarecurrentlyinactive
employment.Around45%ofthePVBandaround60%oftheABOisduetoindividualswhoarealready
retired.
ThemiddlecolumnofTable5showstheresultsofdiscountingthecashflowsusingtheAA+
municipalcurvegrossedupfora25%taxpreference.FocusingontheABO,thisraisestheliabilityto
$507billion,whichis18%abovetheABOatmunicipallychosenratesandonlyslightlyabovethe
liabilitiesonanasstatedbasis(sincetheeffectofthehigherdiscountrateismostlyoffsetbytheeffect
ofthenarroweraccrualmethod).ThePVBatthetaxablemunirateis$662billion,or36%higherthan
theliabilitiesonanasstatedbasis.
The
right
column
of
Table
5
uses
the
procedure
of
discounting
at
Treasury
rates,
which
we
arguedaboveisthepreferredprocedurefortheABO.NowtheABOis$681billion.ThePVBatTreasury
ratesisover$1trillion,butthisdoesnotcreditstatesatallfortheabilitytochangetheparameterson
pensionsowedtocurrentemployees.Ofcourse,instatesthatBrownandWilcox(2009)identifyas
havingstrictconstitutionalguarantees(includingIllinois,NewYork,andLouisiana)thismethodmayin
factbethemostappropriatereflectionofthefactthatsomeU.S.taxpayerswillultimatelyenduppaying
theexpected
benefits
of
all
current
employees.
Netoftheassetsintheplans,theunfundedliabilityis$383billionusingTreasurydiscounting,or
over$5,300percapitaandover$185,000permember.Ifonapermemberbasistheunfundedliability
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isthesamefortheapproximately1millionlocalworkersthatarecoveredbymunicipalplansnotinour
sample,thetotalunfundedliabilityforallmunicipalplansintheU.S.wouldbe$574billion.
Table6breaksdownthiscalculationbysponsoringcityorcounty,andsortsindescendingorder
ofunfundedliabilityperhouseholdatTreasuryrates.8Chicagoisatthetopofthelist,withunfunded
liabilitiesof$41,966percityhousehold,basedonaperpersonunfundedliabilityof$15,718.Notethat
thisrepresentstheunfundedliabilitythatwouldbeowedevenifalltheChicagoplanswerefrozen
today.NewYorkCitycomesinsecondwith$38,886perhousehold,SanFranciscothirdwith$34,940per
household,andBostonfourthwith$30,901perhousehold.Inaggregate,eachmunicipalhouseholdin
the50citiesandcountiesinourstudyowes$14,165tocurrentandretiredemployeesoflocalpension
systems.
5.HowLongWilltheSystemsLast?
InthissectionweexaminethesystemsinthealternativewayconsideredforstatesbyRauh
(2010).WecalculatehowlongtheassetsinthefundsasofJune2009couldpayforbenefitsthatwere
alreadypromisedasof2009,assumingthattargetedinvestmentreturnsareinfactachieved.This
method
assumes
that
cities
will
fully
fund
all
future
benefit
accruals
but
will
not
make
progress
towards
correctingtheunfundedlegacyliabilities.Totheextentthatthecitiesdomakeprogresstowards
correctingtheunfundedliabilitywithlargefuturecontributionincreases,theycanpotentiallydelaythe
dayofreckoning.Totheextentthatthe8%returnsgovernmentsarehopingforarenotachieved,the
horizonsonwhichexistingassetsaresufficienttopayalreadypromisedbenefitsareevenshorter.
Variousriskfactorsaffectactualrunoutdates.Runoutscouldhappensoonerifworkersstart
retiringearly
in
anticipation
of
problems,
iftaxpayers
start
moving
out
of
troubled
states,
or
if
8Tocalculatethesefigures,wecollect2009populationfiguresfromtheU.S.CensusBureautableAnnual
EstimatesoftheResidentPopulationforIncorporatedPlacesOver100,000forcitiesandResidentPopulation
Estimatesforthe100LargestU.S.Counties.Wethenassume2.67(22/3rds)peopleperhousehold,consistent
withthe2000censusdataonhouseholdcomposition.
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contributionsaredeferredornotmade.Runoutscouldhappenlaterifstatesmakefundamental
reformsorcanborrowenoughtofillthehole.Therunoutsalsowouldhappenlaterifstatesusefuture
contributionsnottofundnewbenefitsbutrathertopayforthebenefitsofexistingworkers,althoughin
thatscenariotherunoutswouldbemorelikelytohappenatsomepointasstatesaredigging
themselvesintoadeeperanddeeperhole.
ThefirstcolumnofTable7takesareducedformapproachandsimplytakestheratioof2009
benefitsto2009assets.Forexample,thetoplineshowsthatthisratioforPhiladelphiais5.Ifneither
benefitsnorassetsgrowatall,Philadelphiacouldpaythislevelofbenefitsfor5yearsoutofexisting
assets.BostonandChicagocouldpayfor8years.Attheotherendofthespectrum,FresnoCitycould
payfor23years.
Ofcourse,benefitcashflowswillgrow,asshowninFigure1,evenfortheABO.9Assetsarealso
likelytogrowthroughinvestmentreturns.Thesecondcolumnofthetableassumesthatassetsearn8%
returns,andthattheassetscurrentlyundermanagementplustheseannualreturnsareusedtopay
benefitsthathavealreadybeenpromisedunderthe2009ABO.Theyearlistedincolumn2istheyearin
which
the
assets
will
no
longer
be
sufficient
to
pay
these
benefits
under
these
assumptions.
In
Philadelphia,theassetswouldrunoutin2015,inBostonandChicagotheywouldrunoutin2019.
Theremainingcolumnsshowthatifatthatpointthesemunicipalitiestriedtoswitchtoapayas
yougosystemofpayingthepromisedbenefits,substantialsharesofrevenuewillbeconsumedby
benefits.Expectedbenefitsare25%of2006cityrevenuesforPhiladelphiain2015;theyare40%of2006
cityrevenuesforBostonin2019;andtheyare78%of2006cityrevenuesforChicago.Assumingcity
revenuesgrow
at
3%
per
year,
expected
benefits
are
19%
of
projected
2015
city
revenues
for
9Thatis,evenifpromiseswerefrozenattodayslevelsofserviceandsalary,benefitswillstillgrow,asincreasing
numbersofpeopleareretiringwithincreasinglygenerousbenefitsrelativetothenumbersandbenefitsofretirees
whoaredying.
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Philadelphia;theyare27%ofprojected2019cityrevenuesforBoston;andtheyare53%ofprojected
cityrevenuesforChicago.
SomewhatsurprisinglySanFrancisco,thecitywiththethirdlargestunfundedliabilityper
household,avoidsrunningoutoffundsuntil2032.Itsplanmembersarerelativelyyoung,anditsliability
isdisproportionallyduetoitscurrentworkforce,notretirees.Itscurrentpensionpayoutsare
consequentlylow,atleastrelativetoitstotalliability,andthispushestherunoutfartherintothe
future.Additionally,despiteSanFranciscosextremelylargeunfundedpensionliability,itsplanis
relativelywellfunded.Onlythetwomunicipalitiesatthebottomoftherunoutlist,FresnoCityand
Miami,reporthigherfundinglevelsthanSanFrancisco.
Thesemeasuresaremeanttogiveasenseoftheadequacyofexistingassetstopayforalready
promisedbenefits.Somecitiesmayhaveplansinplacebywhichfuturecontributionswillmakeupfor
unfundedlegacyliabilities,butsuchplansareoftenabandonedinthefaceofafiscalsqueeze.For
example,atthestatelevel,IllinoisandNewJerseyhavecontributionrequirementswhichatsomepoint
theypromisedtheywouldmeet.ButIllinoisisnowpayingthemwithborrowedmoney,andNewJersey
is
only
paying
a
small
fraction
of
the
required
amount.
The
city
of
Chicago
has
actually
received
a
fundingholidayinthecontextofarecentreformthataffectednewworkersinIllinoisstateplans.Tothe
extentthatcitiescreateandadheretoplanstosetasidemoneytopayforunfundedliabilities,the
depletionofthefundscanbedelayed.
6.Conclusion
WhenmeasuredusingTreasuryyields,unfundedliabilitiesofmunicipal(cityandcounty)
pensionplans
add
$574
billion
to
the
$3
trillion
in
unfunded
state
sponsored
plans
that
we
have
documentedinpreviouswork.Onaverage,eachhouseholdinthesecitiesandcountiesowes$14,165in
theformofoffbalancesheetdebttocurrentandformermunicipalpublicemployees,underthe
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narrowestaccountingmeasures,calculatedstrictlyonthebasisofworkalreadyperformedandcurrent
levelsofpublicemployeewagesandsalaries.Underbroadermeasuresthisdebtisevengreater.
Eachofthesehouseholdsalreadyowesalmost$27,000fortheirshareofthe$3trillionstate
pensiondebt.The$14,165oflocaldebtraisesthisburdenforeachhouseholdinoursamplebyover
50%.Ifeachmetropolitanhouseholdwereresponsiblyforanequalshareoftheaggregatecityandstate
unfundedliability,theneachhouseholdintheseareaswouldoweover$41,000.
Ontheonehand,theseaveragestatisticsmaskthefactthatsomecitiesandstatesare
considerablyworseoffthanothers.Forexample,eachhouseholdinChicagoowes$42,000justforthe
Chicagoplans,plusanadditional$29,000fortheirshareoftheIllinoisstateplans,foratotalof$71,000
perhousehold,oraround$76billion.Ontheotherhand,itseemsinfeasiblethatChicago,acitywith
approximately$0.3billioninannualsalestaxrevenueand$0.8billioninannualpropertytaxrevenue,
cancomeupwithpaymentsforlegacyliabilitiesofthismagnitude.Itseemsmorelikelythatthestateof
IllinoiswillendupbailingoutChicago,inwhichcaseallIllinoishouseholdswillendupowingaround
$42,000.Inturn,ifthatwouldbankruptIllinois,thenthefederalmayhavetobackstoptheIllinois
liabilities.
The
distribution
of
the
unfunded
liability
across
different
types
of
taxpayers
is
an
unresolved
matter.
Partoftheuncertaintystemsfromthefactthatresidentsofonemetropolitanareacanmoveto
anotherareainresponsetotaxincreasesorspendingcuts.Atthemetropolitanlevelthisisparticularly
stark,asresidentscanmovetosuburbanareasinresponsetoincreasedtaxesandcutservicesinthe
urbanareas.Thefactthatthereissuchalargeburdenofpublicemployeepensionsconcentratedin
urbanmetropolitan
areas
threatens
the
long
run
economic
viability
of
these
cities.
Countytaxsystemsandstateallocationformulasmayplayaroleinreallocatingresources,
whichmightlimittheabilityofhouseholdstofleetonearbysuburbs.However,theeconomicincentives
areparticularlystrongwhenthecitybordersonothercities,orevenotherstates,thatareinbetter
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financialhealth.Forexample,NewHampshireisjustover30milesfromdowntownBoston,MA;
Delawareisonlyaround20milesfromdowntownPhiladelphia,PA;Indianaislessthan20milesfrom
downtownChicago,IL;andKentuckyisonly5milesfromdowntownCincinnati,OH.
WhatisclearisthatstateandlocalgovernmentsintheUShavemassivepublicpensionliabilities
ontheirhands,andthatwearenotfarfromthepointwherethesewillimpacttheabilityofstateand
localgovernmentstooperate.Giventhelegalprotectionsthatmanystatesaccordtoliabilities,whichin
anumberofcasesderivefromstateconstitutions,attemptstolimittheseliabilitieswithbenefitcutsfor
existingworkerswillonlygosofar(BrownandWilcox(2009),NovyMarxandRauh(2010b)).The
questiongoingforwardisoneofhowthisburdenwillbedistributedbetweenurbanandnonurban
areas,betweenstateandlocalgovernments,amongthemoreandlessfiscallyresponsiblestates,and
betweenlocalandfederalgovernments.Ifthisquestionremainsunresolved,stateandlocalfiscalcrises
maytranslateintolossesformunicipalbondholders.
References
Barro,Robert,1976,RationalExpectationsandtheRoleofMonetaryPolicy,JournalofMonetaryEconomics2,132.
Brown,JeffreyandDavidWilcox,2009,DiscountingStateandLocalPensionLiabilties,AmericanEconomicReview99(2),538542.Duffie,DarrellandKennethJ.Singleton,1997,AnEconometricModeloftheTermStructureofInterest
RateSwapYields,JournalofFinance52(4),12871321.Fisher,Stanley,1975,TheDemandforIndexBonds,JournalofPoliticalEconomy83(3),509534.Krishnamurthy,Arvind,andAnnetteVissingJorgensen,2008,TheAggregateDemandforTreasury
Debt,Kellogg
School
of
Management
Working
Paper.
Lintner,L.,1965,TheValuationofRiskAssetsandtheSelectionofRiskyInvestmentsinStockPortfolios
andCapitalBudgets,ReviewofEconomicStatistics47,1337.Longstaff,FrancisA.,2004,TheFlighttoLiquidityPremiuminU.S.TreasuryBondPrices,JournalofBusiness77(3),511526.
-
8/8/2019 Is Your CITY OUT OF MONEY, FACING INSOLVENCY ?
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Modigliani,FrancoandMertonH.Miller,1958,TheCostofCapital,CorporationFinance,andthe
TheoryofInvestment,AmericanEconomicReview48:261297.NovyMarx,Robert,andJoshuaD.Rauh,2009,TheRisksandLiabilitiesofStateSponsoredPension
Plans,JournalofEconomicPerspectives,23(4):191210.NovyMarx,Robert,andJoshuaD.Rauh,2010a,PublicPensionPromises:HowBigAreTheyandWhat
AreTheyWorth?,JounalofFinance,forthcoming.http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1352608
NovyMarx,Robert,andJoshuaD.Rauh,2010b,PolicyOptionsforStatePensionSystemsandTheir
ImpactonPlanLiabilities,NorthwesternUniversityWorkingPaper.
Poterba,JamesandArturoRamirezVerdugo,2008,PortfolioSubstitutionandtheRevenueCostof
ExemptingStateandLocalGovernmentInterestPaymentsfromFederalIncomeTax,NBERWorking
Paper14439.
Rauh,Joshua,2010,AreStatePublicPensionsSustainable?WhytheFederalGovernmentShouldWorry
AboutStatePensionLiabilities,NationalTaxJournal63(3).Sharpe,W.F.,1964,CapitalAssetPrices:ATheoryofMarketEquilibriumunderConditionsofRisk,
JournalofFinance19,425442.Treynor,JackL.,1961,TowardaTheoryoftheMarketValueofRiskyAssets,UnpublishedManuscript.
Woodford,Michael,1990,PublicDebtasPrivateLiquidity,AmericanEconomicReview80,38288.
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Figure1:ProjectedAggregateCashFlowsfor77MajorMunicipalPensionSys
This figure shows projected aggregate cash flows by local governments due to public pension promises, as would be
methods.Cashflowprojectionsforeachlocalplanaremadesothatthelocalplansreportedliabilityequalsthediscounted
municipalityschosenaccrualmethodandreporteddiscountrate.
0
10
20
30
40
50
60
70
80
2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070
PlansFrozenToday(AB
CommonGovtAccoun
ActualExpectedBenef
$bn
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Figure2:ProjectedAggregateCashFlowsforActives,Annuitants,andSeparated
0
10
20
30
40
50
60
70
20 10 2 01 5 20 20 2 02 5 2 03 0 2 03 5 20 40 2 04 5 20 50 20 55 20 60 2 06 5 20 70 2 07 5 2 08 0
ABOActiveOnly
EANActiveOnly
PVBActiveOnly
$bn
0
5
10
15
20
25
30
2010 2015 2020 2025 2030 2035 2040 2045 2050 2 055 2 060 2 065 2070 207 5 208 0
Separatedin2009Annuitantin2009
$bn
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Figure3:ZeroCouponYieldCurvesasof30June2009
ThisgraphshowszerocouponyieldcurvesforTreasuries,aswellasAA+municipalbondsasof30June2009.Yieldson
Bloomberg.Thezerocouponyieldswerecalculatedfromstripprices,whichweobtainedbyconstructinglongshortportfol
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Table1:SummaryofPlansandParticipants
Thetoppanelsummarizesthenumbersofindividualmembersineachofthreemaincategories:activeworkers,annuitant
longerinpublicemployment.Thesampleis77majorcityandcountypensionplanssponsored,covering2/3rdsoftheunive
systems.Allmajorplansin50majormunicipalsystemsarerepresented.Thebottompanelliststhesedataforthe10stat
thelargestbytotalmembers.
MemberCounts(NumberofPlans=7
Separated&
Active Annuitants Vested
SummaryStatisticsTotal 1,109,095 809,214 122,944 2
Mean 14,404 10,496 1,597
Median 6,277 5,322 595
StdDev 26,675 18,363 2,581
Largest10PlansNewYorkCityEmployeeRetirementSystem 187,327 133,277 8,949
Teachers'RetirementSystemoftheCityofNewYork 114,307 71,259 6,247
LosAngelesCountyEmployeesRetirementSystem 96,382 53,397 12,071
NewYorkCityPolicePensionFund 36,044 45,176 829
MunicipalEmployees'AnnuityandBenefitFundofChicago 33,214 23,185 12,324
CityofPhiladelphiaMunicipalRetirementSystem 28,632 35,694 1,336
ChicagoTeachers'
Pension
Fund
32,728 24,398
3,549
SanFranciscoEmployees'RetirementSystem 31,263 21,944 4,841
BostonRetirementSystem 22,512 14,408 9,896
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Table2:DescriptionofMethodsforRecognizingAccruedLiabilities
This table summarizes the four main methods for recognizing pension liabilities. The methods differ in their
treatmentofexpectedfuturesalary increasesandservicethat isyettobeperformed.Themethodsare listed in
increasingorderofbroadness,startingwiththemethodthatonlyreflectscurrentserviceandsalaryandending
withthemethodthatreflectsafullprojectionofbenefitsthatareexpectedtobepaid.
AccumulatedBenefitObligation(ABO) Representspromisedbenefitsundercurrentsalary
andyearsofservice.Oftenusedinterchangeably
withtheconceptsofterminationliability,or
liabilityiftheplanwerefrozen,althoughthereare
somedifferences(seetext).
ProjectedBenefitObligation(PBO) Takesprojectedfuturesalaryincreasesinto
account
in
calculating
todays
liability,
but
not
futureyearsofservice.UsedinFASBaccounting
forcorporations.
EntryAgeNormal(EAN) Reflectsaportionoffuturesalaryandserviceby
allowingnewliabilitiestoaccrueasafixed
percentageofaworkerssalarythroughouthis
career.
PresentValueofBenefits(PVB) Fullprojectionofwhatcurrentemployeesare
expectedtobeowediftheirsalarygrowsandthey
work/retireaccording
to
actuarial
assumptions.
Table3:DiscountRatesUsedByMunicipalPlans(N=77)
mean 8.03%
median 8.00%
stdev 0.36%
min
7.50%
max 10.00%
numberofplans 77
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Table4:DistributionofRetireesandAverageAnnuityByAge
The CAFRs of the 77 sample plans were searched fordistributions of retirees and average annuity by age. This
informationwasprovidedin17plans:AnneArundelCountyRetirementSystem,BaltimoreEmployees'Retirement
System, City of Philadelphia Municipal Retirement System, Fire and Police Employees' Retirement System of
Baltimore,Laborers'andRetirementBoardEmployees'AnnuityandBenefitFundofChicago,MetropolitanWater
ReclamationDistrict
Fund
of
Greater
Chicago,
New
York
City
Board
of
Education
Retirement
System,
New
York
City
EmployeeRetirementSystem,NewYorkCityFirePensionFund,NewYorkCityPolicePensionFund,Retirement
Plan for Chicago Transit Authority Employees, Retirement System for Employees of the City of Cincinnati, San
JoaquinCountyEmployees'RetirementAssociation,SantaBarbaraCountyEmployees'RetirementSystem,Seattle
CityEmployees'RetirementSystem,TacomaEmployees'RetirementSystem,Teachers'RetirementSystemofthe
CityofNewYork.Thestatisticshererepresentequalweightedaveragesacrossthoseplans.
AgeBracket FractionofRetirees AverageAnnuity
Under50 5% $22,568
5054 6% $33,457
5559 11% $38,092
6064
19%
$37,020
6569 17% $31,908
7074 14% $27,685
7579 11% $25,684
8084 9% $23,159
8589 5% $20,045
90+ 3% $17,440
Total 100% $30,091
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Table5:MunicipalLiabilitiesUnderDifferentDiscountRatesandActuarialMethods
DiscountRate
FiguresinbillionsofU.S.dollars MunicipalChosen TaxableMuni TreasuryTotal(Active+Annuitants+Separated)
AsStated,Unharmonized $488
AccumulatedBenefitObligation(ABO) $430 $507 $681
ProjectedBenefitObligation(PBO) $477 $557 $784
EntryAgeNormal(EAN) $489 $571 $810
ProjectedValueofBenefits(PVB) $581 $662 $1.047
ActiveParticipantsOnly
AccumulatedBenefitObligation(ABO) $165 $190 $292
Projected
Benefit
Obligation
(PBO)
$211 $240
$395EntryAgeNormal(EAN) $224 $254 $421
ProjectedValueofBenefits(PVB) $315 $345 $658
AnnuitantsOnly $260 $310 $376
SeparatedNotYet $6 $6 $13
ReceivingBenefitsOnly
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Table6:MunicipalLiabilitiesinDescendingOrderofUnfundedLiabilityPerCapita
The firstcolumnshows liabilitiesonastatedbasisasaggregated fromgovernmentreports.Thesecondcolumn
shows our calculation of accumulated liabilities discounted using the Treasury yield curve as of June 2009. The
thirdcolumnshowsnetpensionasset.Thefourthcolumnshowstheunfunded liability indollartermsasofJune
2009.ThefifthshowstheJune2009unfunded liabilityasashareof2006revenue,where2006 isthe latestyear
detailedcityandcounty revenueswereavailable from theU.S.Census ofGovernments tablesonState &Local
Governmentfinances.Tocalculateperhouseholdfigures,wecollect2009populationfiguresfromtheU.S.Census
Bureau tableAnnualEstimatesof theResidentPopulation for IncorporatedPlacesOver100,000 forcitiesand
Resident PopulationEstimates for the 100Largest U.S.Counties.We then assume2.67 (2 2/3rds) people per
household,consistentwiththe2000censusdataonhouseholdcomposition.
Name(NumberofPlans)
Liabilities,
Stated
Basis,
June09
($B)
Liabilities
(ABO),
Treasury
Rate
Net
Pension
Assets
($B)
Unfunded
Liability
($B)
Unfunded
Liability/
Revenue
Unfunded
Liability
per
Household($)
Chicago(7) 46.3 66.6 21.8 44.8 763% 41,966
NewYorkCity(5) 155.8 214.8 92.6 122.2 276% 38,886SanFrancisco(1) 16.3 22.6 11.9 8.7 306% 34,940
Boston(1) 7.4 11.0 3.6 7.5 430% 30,901
Detroit(2) 8.1 11.0 4.6 6.4 402% 18,643
LosAngeles(3) 34.6 49.3 23.2 26.1 378% 18,193
Philadelphia(1) 9.0 13.0 3.4 9.7 290% 16,690
Cincinnati(1) 2.2 3.2 1.2 2.0 321% 15,681
Baltimore(2) 4.4 6.4 2.7 3.7 260% 15,420
Milwaukee(1) 4.4 6.7 3.3 3.4 687% 14,853
FairfaxCounty(4) 8.3 11.1 5.5 5.6 169% 14,415
Hartford(1) 1.2 1.6 0.9 0.7 249% 14,333
St
Paul
(1)
1.5
2.2
0.8
1.4
464%
13,686
Jacksonville(2) 4.1 6.0 2.0 4.0 278% 12,994
Dallas(2) 7.4 10.8 4.6 6.3 298% 12,856
ContraCostaCounty(1) 6.3 8.7 3.7 5.0 425% 12,771
SantaBarbaraCounty(1) 2.3 3.3 1.4 1.8 329% 11,995
KernCounty(1) 4.2 5.6 2.0 3.6 612% 11,919
SanJose(2) 5.4 7.5 3.4 4.1 321% 11,391
Houston(3) 11.1 16.4 7.2 9.1 356% 10,804
NashvilleDavidson(1) 2.9 4.1 1.8 2.3 151% 10,048
ArlingtonCounty(1) 1.5 2.0 1.2 0.8 103% 10,000
Miami(2) 2.3 3.3 1.7 1.6 318% 9,689
SanMateoCounty(1) 3.0 4.1 1.6 2.5 413% 9,415
Seattle(1)
2.6
3.6
1.5
2.1
165%
9,125
SanJoaquinCounty(1) 2.7 3.8 1.5 2.3 525% 9,119
Tacoma(1) 1.1 1.4 0.8 0.7 198% 9,082
SacramentoCounty(1) 6.7 8.9 4.4 4.5 452% 8,582
Memphis(2) 3.5 4.6 2.5 2.1 291% 8,432
FresnoCounty(1) 3.6 5.1 2.3 2.9 843% 8,401
SonomaCounty(1) 2.0 2.6 1.1 1.5 397% 8,394
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OrangeCounty(1) 11.5 15.6 6.2 9.3 604% 8,233
VenturaCounty(1) 3.5 4.9 2.4 2.5 352% 8,195
MontgomeryCounty(1) 3.5 5.1 2.1 3.0 91% 8,118
AlamedaCounty(1) 5.7 8.0 3.8 4.2 353% 7,579
LosAngelesCounty(1) 44.5 60.0 32.4 27.6 367% 7,473
FortWorth(1) 2.3 3.3 1.4 2.0 300% 7,212
AnneArundel
County
(1)
1.7
2.4
1.0
1.4
111%
7,081
SanBernardinoCounty(1) 7.0 9.6 4.5 5.1 407% 6,716
StanislausCounty(1) 1.6 2.4 1.1 1.3 486% 6,698
BaltimoreCounty(1) 2.6 3.5 1.6 1.9 113% 6,577
SanDiegoCounty(1) 9.2 13.4 6.2 7.2 631% 6,329
DeKalbCounty(1) 1.8 2.3 1.0 1.4 186% 4,873
CookCounty(2) 10.9 14.3 6.1 8.2 365% 4,112
TulareCounty(1) 1.0 1.4 0.8 0.7 392% 4,068
FresnoCity(2) 1.6 2.4 1.7 0.7 172% 3,647
FultonCounty(1) 1.5 2.1 0.9 1.3 142% 3,276
SanAntonio(1) 2.4 3.4 1.8 1.7 140% 3,201
Phoenix(1) 2.5 3.3 1.4 1.9 111% 3,176
Tampa(2) 1.3 2.0 1.7 0.3 57% 2,309
Total(78) $488.3 $681.0 $298.3 $382.7
ValueWeighted 320% $14,165
EqualWeighted 337% $11,421
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Table7:YearsThatExistingAssetsAreAdequatetoPayAccruedBenefits
Tobeincluded,asystemmustpayoutmorethan20%of2006revenuesatdepletionyear.
ExpectedBenefitsinYearFollowing
2009
Benefits/
Assets
(Years)
Assets
Earning8%Pay
ABOCash
Flows
Through $million
shareof
2006
revenue
shareof
projected
revenue
(g=3%)
Philadelphia(1) 5 2015 827.2 25% 19%
Boston(1) 8 2019 695.1 40% 27%
Chicago(7) 8 2019 4551.1 78% 53%
Cincinnati(1) 9 2020 218.9 36% 24%
Jacksonville(2) 9 2020 437.8 31% 20%
StPaul(1) 8 2020 151.3 49% 32%
NewYork
City
(5)
9
2021 15976.2
36%
23%
Baltimore(2) 9 2022 480.1 34% 21%
DeKalbCounty(1) 12 2022 215.1 29% 18%
FultonCounty(1) 10 2022 169.1 19% 12%
KernCounty(1) 12 2022 480.4 82% 51%
BaltimoreCounty(1) 11 2023 308.7 18% 11%
Detroit(2) 10 2023 872.7 55% 33%
FortWorth(1) 12 2023 289.7 44% 27%
Phoenix(1) 11 2023 305.5 18% 11%
SonomaCounty(1) 12 2023 242.0434 65% 39%
Nashville&
Davidson
County
(1)
11
2024 318.5
21%
12%
SanJoaquinCounty(1) 14 2024 340.6 78% 46%
SanMateoCounty(1) 14 2024 360.7 59% 35%
Seattle(1) 12 2024 310.599 24% 14%
ContraCostaCounty(1) 14 2025 795.1 68% 39%
CookCounty(2) 14 2025 1326.7 59% 34%
MontgomeryCounty(1) 13 2025 441.8 14% 8%
OrangeCounty(1) 15 2025 1508.8 98% 56%
AnneArundelCounty(1) 14 2026 229.8 19% 10%
Dallas(2) 14 2026 1048.5 50% 28%
FresnoCounty
(1)
14
2026 484.1
142%
78%
Houston(3) 16 2027 1726.2 67% 36%
LosAngeles(3) 14 2027 4586.5 66% 36%
Miami(2) 12 2027 251.4 51% 27%
SanJose(2) 16 2027 777.4 61% 33%
SantaBarbaraCounty(1) 16 2027 330.2 59% 32%
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AlamedaCounty(1) 15 2028 824.4 69% 36%
Hartford(1) 11 2028 126.2 47% 25%
Memphis(2) 12 2028 390.9 53% 28%
Milwaukee(1) 13 2028 612.2 125% 65%
SanDiegoCounty(1) 15 2028 1362.2 119% 62%
StanislausCounty
(1)
15
2028 236.2
90%
47%
FairfaxCounty(4) 14 2029 1076.0 32% 16%
SanBernardinoCounty(1) 17 2029 1116.1 90% 45%
VenturaCounty(1) 16 2029 531.2 76% 38%
SacramentoCounty(1) 19 2030 1099.7 110% 54%
Tacoma(1) 16 2031 159.8 47% 22%
SanFranciscoCityandCounty(1) 16 2032 2595.1 74% 34%
LosAngelesCounty(1) 16 2033 6844.8 91% 41%
SanAntonio(1) 19 2033 431.7 37% 16%
TulareCounty(1) 17 2034 157.0 93% 41%
ArlingtonCounty
(1)
17
2038 254.5
32%
12%
FresnoCity(2) 23 Never
Tampa(2) 14 Never