Crisis in Local Govt Pensions

8/8/2019 Crisis in Local Govt Pensions

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1

TheCrisisinLocalGovernmentPensionsintheUnitedStates*

ROBERTNOVYMARX,UNIVERSITYOFROCHESTERANDNBER

JOSHUARAUH,KELLOGGSCHOOLOFMANAGEMENTANDNBER

October2010

Abstract

WecalculatethepresentvalueoflocalgovernmentemployeepensionliabilitiesasofJune2009for

approximately2/3rdsoftheuniverseoflocalgovernmentemployees.Usinglocalgovernmentaccounting

methods,thetotalunfundedliabilityintheseareasis$190billionorover$7,000permunicipal

household.Whengovernmentaccountingiscorrectedbydiscountingalreadypromisedbenefitsatzero

couponTreasuryyields,thetotalunfundedobligationis$383billionorover$14,000perlocal

household.If

on

aper

member

basis

the

unfunded

liability

is

the

same

for

the

1/3

rd

of

workers

covered

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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fractionofthePVB.ThePBOandtheEANarethereforeintermediatemeasuresbetweentheABOand

thePVB.

ThePBOaccountsfullyforexpectedfuturewageincreasesforexistingworkers,butnot

expectedfutureservice.Mathematically,thePBOformularecognizesthePVBinawaythatisprorated

byservice.NotethatFASBaccountingforpubliclytradedcorporationsrequiresthecalculationofaPBO.

TheEANisbroaderthanthePBO,butnotasbroadasthePVB.Mathematically,theEANmethod

recognizesthePVBinproportiontodiscountedwagesearnedtodaterelativetodiscountedexpected

lifetimewages.Inpractice,thisprocedureaccountsforsomeportionoffuturebenefitaccrualsdueto

bothwagesandfutureservice.

Table2summarizestheliabilityconcepts.Furtherdetails,includingformulas,areprovidedin

NovyMarxandRauh(2010a).Wenotethatnoneofthesemethodsaccountfortheexpectedbenefits

thatwillbeowedtoworkerswhohavenotyetbeenhired.

B.DiscountRatesAsexplainedinNovyMarxandRauh(2009,2010),thediscountratethatstateandlocal

governments

use

under

GASB

accounting

procedures

does

not

reflect

the

risk

of

the

liabilities.

Discountingliabilitiesatanexpectedrateofreturnontheassetsintheplanrunscountertotheentire

logicoffinancialeconomics:financialstreamsofpaymentshouldbediscountedataratethatreflects

theirrisk(ModiglianiandMiller(1958)),andinparticulartheircovariancewithpricedrisks(Treynor

(1961),Sharpe(1964),Lintner(1965)).

Governmentsdiscounttheliabilitiesataflatrate,andusuallythisrateisverycloseto8%.As

shownin

Table

3,

the

mean

discount

rate

for

the

77

systems

in

our

sample

is

8.03%,

the

median

rate

is

8.00%,andthestandarddeviationis0.36%.Themodelrateis8.00%,usedby33ofthe77systems.

Governmentsjustifytheirdiscountrateswiththeargumentthattheyarediscountingliabilitiesatthe


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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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15

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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16

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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17

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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18

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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19

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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20

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.


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21

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.


22/32


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23

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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24

Figure3:ZeroCouponYieldCurvesasof30June2009

ThisgraphshowszerocouponyieldcurvesforTreasuries,aswellasAA+municipalbondsasof30June2009.Yieldson

Bloomberg.Thezerocouponyieldswerecalculatedfromstripprices,whichweobtainedbyconstructinglongshortportfol


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25

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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26

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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27

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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28

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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29

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 13.3 9.3 266% 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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30

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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32

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

Documents

Crisis in Local Govt Pensions