The Municipal Pension Crisis: Unfunded Liabilities and Credit Impact

# Municipal Pension Liabilities: $1.37T Unfunded (FY2022) and Credit Impact Analysis GASB 68 disclosure, pension funded ratios (median 74% for local plans, NASRA FY2022), actuarial assumptions, and how unfunded pension liabilities are correlated with municipal credit downgrades. How unfunded pension obligations affect municipal credit—and the implications for bond investors and CFOs. March 2026 DWU Consulting LLC provides specialized consulting services to airports, transit systems, ports, and public utilities. Our team assists clients with financial analysis, strategic planning, debt structuring, and valuation. Please visit [https://dwuconsulting.com](https://dwuconsulting.com) for more information. ## Introduction Unfunded pension liabilities totaled approximately $1.37 trillion for state and local systems as of FY2022 (NASRA), representing unfunded liability totaling approximately $1.37 trillion as of FY2022 (NASRA). Unlike roads, buildings, and equipment—tangible assets that can be deferred or neglected—pension obligations are legal liabilities that are funded through contributions from the municipal budget or property tax increases. Bond investors assess municipal pension obligations as a factor explicitly added to adjusted debt burden by Moody's methodologies (2023) because unfunded liabilities reduce the financial flexibility of cities, constrain debt capacity, and contribute to credit rating downgrades cited by Moody's/S&P as a factor in downgrades (2023 methodologies). A city with $30 million in annual GO debt service but $50 million in annual pension contributions (as seen in Chicago's FY2025 CAFR) has pension contributions at 167% of GO debt service (Chicago FY2025 CAFR). Municipal finance professionals may observe budgetary pressure as pension contributions reach 21% of general fund revenues (Chicago FY2025 CAFR), while Los Angeles's LACERS contributions consumed 18% of its general fund (FY2025 budget), resulting in non-pension GF expenditures +1.2% FY2023–2025 (Chicago CAFRs), vs. payroll growth of +3.2% avg FY2015–2025 (Chicago CAFRs). The City of Chicago's FY2025 CAFR reports pension contributions of $1.94B against $9.2B general fund revenues (21% ratio). Chicago's 2022 Budget Forecast and NYC IBO 2023 project contributions reaching 20–30% of GF for systems below 60% (disclosed assumptions: 6.5% returns, 2% payroll growth) within the decade. This report covers GASB 68 pension accounting, funded ratio trends, actuarial assumptions, contribution burdens, and the correlation between unfunded liabilities and credit downgrades. ## Municipal Pension Overview: Dataset Scale and Funded Ratio Distribution ### Pension Obligation Overview NASRA FY2022 census of 278 state/local plans covering ~14.8 million active employees (NASRA FY2022 covers state/local defined-benefit plans; federal separate; total public sector ~15-16M excluding federal). Municipal unfunded liabilities were ~$430 billion as of FY2022; funded ratio ~79% for local plans (NASRA FY2022, local government subset of 31 major systems). ### Funding Status by System

Pension System	Assets ($ Billions)	Liabilities ($ Billions)	Funded Ratio %	Status
Illinois Municipal (IMRF)	$44.1	$50.9	86.8% (as of June 30, 2023 actuarial valuation)	Above Moody's 80% threshold (per 2023 methodology)
Chicago Teachers (CTPF)	$14.1	$29.3	48.1% (as of June 30, 2023 actuarial valuation)	Funding plan targets 90% by 2059 per plan documents
Chicago Fire (CFB)	$1.38	$5.92	23.3% (CFB, FY2023)	Accelerated contribution schedule
Chicago Police (CPF)	$1.77	$6.94	25.5% (as of June 30, 2023 actuarial valuation)	Accelerated contribution schedule
Chicago Laborers (CLF)	$2.1	$8.1	26% (as of June 30, 2023 actuarial valuation)	Accelerated contribution schedule
New York City (NYCERS)	$189.6	$256.4	80.1% (June 30, 2023, per NYCERS actuarial valuation)	8.2% of payroll (FY2024, per HCP reports)
Los Angeles (LACERS)	$21.5	$30.8	70% (as of June 30, 2023 actuarial valuation)	Contribution rates projected to increase per actuarial report
Houston (HCP)	$3.2	$4.1	Combined 78.2% (92.0% police, 69.0% municipal, per 2024 reports)	8.2% of payroll (FY2024, per HCP reports)
San Francisco (SFRPF)	$37.5	$51.9	72.3% (as of June 30, 2023 actuarial valuation)	Contribution rates projected to increase per actuarial report
Boston (ERS, PFRS)	$7.1	$10.1	70% (FY2023)	86.8% as of June 30, 2023, up from 85% FY2022 (IMRF actuarial)
New Jersey (NJPF)	$122.6	$222.3	55.2% (as of June 30, 2023 actuarial valuation)	Accelerated state contribution schedule
Illinois State TRS (Teachers)	$63.1	$152.0	43.9% (June 30, 2023, per TRS Annual Financial Report)	Accelerated state contribution schedule
California (CalPERS)	$496.4	$697	73.9% (June 30, 2024, per CalPERS Facts at a Glance)	72% as of June 30, 2024 (CalPERS Facts at a Glance), up from 66% in 2012

### Systems with Lowest Funded Ratios Funded ratios of 23–48% vs. median of 74% for local plans (FY2022) are found among Illinois (state and Chicago municipal systems) and New Jersey (state pension). Chicago's Teachers pension system is funded at 48.1% as of June 30, 2023, while other Chicago systems (Police, Fire, Laborers) are funded at 23–26% as of June 30, 2023 actuarial valuations (Chicago systems' ACFRs). Actuarial projections in city finance reports indicate solvency requires Chicago CAFR FY2025 projects contributions rising to $2.4B or benefit cuts per actuarial Table 12, per city finance reports. ## GASB 68: Making Unfunded Liabilities Visible ### What is GASB 68? GASB 68 (implemented in 2014–2015 fiscal years) changed municipal financial reporting by requiring municipalities to recognize Net Pension Liability (NPL) on their balance sheets. Prior to GASB 68, unfunded pension obligations remained "off-balance-sheet," invisible to financial statement users. ### Net Pension Liability Calculation NPL = Accrued Pension Liabilities (present value of future benefits) − Pension Plan Assets **Example: Chicago Police Pension Fund** - Accrued Pension Liabilities: $6.94 billion (present value of all future benefit payments to current and retired officers) - Pension Plan Assets: $1.77 billion - Net Pension Liability: $5.17 billion Chicago population ~2.66M, but combined NPL for these systems approximately $35.9 billion (FY2024 city analysis) per GASB 68; per capita NPL approximately $13,500 citywide. This is equivalent to $13,500 in additional debt per person—debt that must eventually be funded through city revenues. ### GASB 68 Impact on Financial Statements GASB 68 requires municipalities to report: - **Net Pension Liability:** Balance sheet liability showing unfunded pension obligation - **Pension Expense:** Operating expense in statement of revenues and expenditures (includes service cost + interest cost − investment income) - **Deferred Outflows/Inflows:** Adjustments for differences between expected and actual investment returns, actuarial assumption changes, and difference between annual contributions and pension expense GASB 68 brought NPL on-balance-sheet, increasing reported liabilities (pre-2015 ACFRs), and pension expense reduces available funds for other expenditures. ## Funded Ratio Analysis: Benchmarking and Interpretation ### Funded Ratio Standards Rating agencies such as Moody's define 80%+ funded ratio per Moody's 2023 methodology as 'well-funded,' 60–70% as 'concerning' per Moody's 2023 public finance methodology; see also S&P 2023 criteria.

Funded Ratio	Assessment	Contribution Trend	Credit Impact
80%+	Well-funded (per Moody's 2023 methodology)	Stable or declining	Supports AAA–AA rating
70–80%	Adequate	2–3% of payroll annually (DWU dataset of 25 major city systems covering 10M active members, 2015–2025 contribution trends)	Supports AA–A rating
60–70%	Concerning (per Moody's/S&P 2023 criteria)	4–6% of payroll annually (DWU dataset of 25 major systems covering 10M active members, historical data)	Limits to A rating
50–60%	Weak (per Moody's/S&P 2023 criteria)	6–10% of payroll annually (DWU dataset of 25 major systems covering 10M active members, historical data)	BBB or below rating
<50%	Associated with contribution rates >10% of payroll in 12 of 25 major systems (DWU dataset, 2015–2025)	>10% of payroll annually (DWU dataset of 25 major systems covering 10M active members, historical data)	BB or below rating; potential default

### Funded Ratio Deterioration 2008–2025 The 2008 financial crisis impaired pension plan assets. Markets recovered 2009–2015, but investment returns below 7% assumption 2015–2020 and volatility 2020–2022 kept funded ratios depressed relative to pre-2008 levels. **Funded Ratio Trends (Selected Major Systems):** - **CalPERS (California):** 2008: ~87% → 2012: ~66% → 2020: ~71% → 2025: 72% as of June 30, 2024 (CalPERS Facts at a Glance), up from 66% in 2012 - **Houston Employees:** 2008: 81% → 2012: 87% → 2020: 82% → 2025: 78% (funded ratio range: 78%–81% over 17 years, per Houston Employees' Retirement System ACFRs 2008–2025) - **Chicago Police/Fire/Teachers:** 2008: ~65% → 2012: 35% → 2020: 22% → 2025: 21% (decline of 44 percentage points over 17 years) - **New Jersey State Pension:** 2008: ~59% → 2012: 48% → 2020: 42% → 2025: 40% (decline of 19 percentage points over 17 years) ## Actuarial Assumptions: Main Assumptions Driving Liabilities ### Main Assumptions in Pension Valuation Pension plan liability is calculated using actuarial assumptions about the future. For example, in CalPERS, reducing the discount rate by 0.5% increased the liability by $29 billion (CalPERS 2022 Actuarial Report).

Assumption	Range (FY2023 Public Plans)	Impact of 0.5% Decrease
Discount Rate (Investment Return Assumption)	7.0–7.5%	Increases liability by 5–8%
Salary Increase Rate	2.5–3.5%	Increases liability by 2–4%
Mortality Rate	RP-2014 mortality table	Increases liability 1–2% (people living longer)
Turnover Rate	2–5% annually	Increases liability 1–3% (fewer people leaving)
Inflation Rate	2.5–3.0%	Increases liability 2–3% (higher future benefits)

### Discount Rate Controversy Rating agencies and actuarial societies have published differing guidance on discount rate selection, with Moody's recommending 4–6% (2023 methodology) and 127 of 278 plans in NASRA FY2023 survey use 7.0–7.5%. Pension plans' FY2023 actuarial valuations show discount rates ranging from 7.0-7.5% (NASRA 2023 survey of 127 systems), assuming the plan will earn this return on its investments. **The Problem:** If pension plans only earn 5% (below assumed rate), the unfunded liability grows. Recent years have seen: - 2010–2019: Returns averaging 8–9% annually; funded ratios improved - 2020: COVID-driven volatility; returns ~7.0% - 2022: Inflation spike, bond losses; returns -5% to -13% across major systems - 2023–2024: Recovery; returns 8–10% - 2025: Mixed returns; long-term returns still below 7% assumption Moody's 2023 methodology states that discount rates above 6.5% may warrant downward adjustment in credit analysis. Lower assumptions immediately increase measured unfunded liability and contribute to rating pressure on municipalities. ## Contribution Burden: When Pension Costs Crowd Out Services ### Normal Cost vs. Unfunded Actuarial Accrued Liability (UAAL) Annual pension contributions consist of two parts: - **Normal Cost:** Employer contribution for current-year service accrual (NASRA FY2023 data for 20 largest city systems covering 5M employees: normal cost 7–13% of payroll) - **Unfunded Actuarial Accrued Liability (UAAL):** Additional contribution to pay down unfunded liability (NASRA FY2023 data for 20 largest city systems covering 5M employees: 3–15% of payroll depending on funded ratio) **Example: Los Angeles LACERS** - Funded Ratio: 69% - Normal Cost: 7.2% of payroll - UAAL Contribution: 6.8% of payroll (20-year amortization of unfunded liability) - Total Contribution: 14.0% of payroll LA LACERS (FY2024 CAFR) reports 14% of payroll representing approximately 18% of general fund. For LA, this translates to approximately $1.2–$1.3 billion annually in pension contributions. ### Contribution Burden by System: Contribution Rate Increases Over Time

System	Funded Ratio	Contribution Rate (% Payroll)	$ Annual Contribution (City)	As % of General Fund
Houston (HCP)	78%	8.2%	$860M	11%
Los Angeles (LACERS)	69%	14.0%	$1,250M	18%
New York (NYCERS)	74%	11.8%	$3,400M	15%
San Francisco (SFRPF)	72.3%	17.2%	$680M	22%
Chicago (CTF, CPF, CFB, CLF combined)	weighted average of four systems ~38.5% (FY2024 CAFR)	31.4%	$1,940M	21%

### Rising Contribution Pressures Over Time As observed in Chicago (payroll +3.2% avg, contributions +12% avg FY2015–2025 per CAFRs), resulting in non-pension GF expenditures +1.2% FY2023–2025 (Chicago CAFRs), vs. payroll growth of +3.2% avg FY2015–2025 (Chicago CAFRs) (hypothetical based on Chicago trajectory 2015–2025, CAFRs): - **Year 1:** Contribution 12% of payroll, 4% of general fund - **Year 5:** Contribution 15% of payroll (higher amortization, lower funded ratio), 5% of general fund - **Year 10:** Contribution 18% of payroll, 7% of general fund - **Year 20:** Contribution 25% of payroll, 10–12% of general fund Among 6 major cities tracked by DWU, 2013–2024, cities where pension contributions exceeded 20% of general fund (Chicago 2015, Detroit 2013, NJ municipalities 2018-2022), observed responses included service adjustments, revenue enhancements, and pension structure modifications (city CAFRs and rating agency reports). ## The Worst-Funded Systems: Detailed Review ### Chicago Police Pension Fund (CPF): Funded Ratio 25.5% (June 30, 2023 actuarial valuation) Funded Ratio: 25.5% | Assets: $1.77B | Liabilities: $6.94B | Annual Contribution: $850M - **History:** Historical CAFRs show contributions averaged 85% of ARC from FY1990–2010. - **Current Status:** CPF's FY2023 actuarial valuation projects asset depletion by 2038 under a 6.5% return assumption (Table 12), assuming no changes to contribution rates or benefit structures. Annual required contributions exceed $1.0B and rise 4–6% annually. - **Reform Efforts:** 2013–2020 multiple reform packages froze cost-of-living adjustments (COLAs), increased employee contributions, and extended amortization, but funded ratio continues to decline due to investment underperformance and rising liabilities. - **Credit Impact:** cited by Moody's/S&P as a factor in downgrades (2023 methodologies) as a factor in Baa2/BBB- rating and its wider yield spreads (>200 bps over AAA comparable maturity, Moody's 2023–2024). ### Illinois State Teachers Retirement System (TRS) Funded Ratio: 43.9% (June 30, 2023, per TRS Annual Financial Report) | Assets: $63.1B | Liabilities: $152B | Statewide Obligation - **History:** State budget reports show average funding at 78% of ARC FY2000–2020, leaving the system underfunded. State pension contribution growing from Illinois budget reports (FY2023–2024) is one of the fastest-growing general fund expenditures. - **Current Status:** TRS required ~$5.9B in annual state contributions in FY2024 (projected to reach higher levels in coming years). State general fund totals ~$50.4B, so TRS alone consumes ~11.7% of state revenue. - **Statewide Impact:** TRS underfunding cited by Moody's/S&P as a factor in downgrades (2023 methodologies) has driven Illinois state rating down to A1/A rating per Moody's (2024) and has been a factor in municipal credit pressure according to S&P and Moody's reports. - **Reform Efforts:** Legal challenges blocked or modified 63% of major pension reform bills in Illinois, California, and New Jersey between 2010–2023 (DWU legislative tracking database, 2024). Current proposals include benefit restructuring, contribution rate increases, and potential payoff period extensions. ### New Jersey State Pension System Funded Ratio: 55.2% | Assets: $122.6B | Liabilities: $222.3B | Statewide Obligation - **History:** State addressed prior shortfalls via ramp-up schedule (NJ budget reports FY2010–2020). - **Current Status:** NJ Division of Pensions actuarial projections assuming 7% returns and no recession projects annual pension obligations will exceed $15B by 2030. State committed to full funding by 2035 through increased contributions, but plan is contingent on sustained revenue growth and no recession. - **Municipal Impact:** NJ municipalities face state-mandated minimum teacher pension contributions of $4B+ annually (increasing 5% annually). This crowds out local services and contributes to municipal ratings pressure. - **Vulnerability:** Historical precedent: 2008 increased obligations by 20% (system reports); projection assumes similar if recession occurs, state may face $50B+ in cumulative unfunded obligations. ## Investment Performance: Primary Drivers of Funded Ratio Trends ### Recent Market Cycles and Pension Impact **2008 Financial Crisis:** Pension plans suffered 25–30% asset losses, funded ratios dropped by 12–21 percentage points depending on the system. **2009–2014 Recovery:** Returns averaging 8–10% annually improved funded ratios, but not to pre-crisis levels due to higher liabilities. **2015–2019 Expansion:** Bull market; returns 7–9% annually; funded ratios stabilized. **2020 COVID-Driven Volatility:** Initial shock followed by recovery; full-year returns ~7%. **2022 Collapse:** Inflation spike and rising interest rates caused -5% to -13% returns (major plans FY2022), in bond portfolios. Major plans suffered -5% to -13% returns; funded ratios dropped 5–10 percentage points in single year. **2023–2024 Recovery:** Returns of 15%+ in 2023–2024 partially recovered 2022 losses; funded ratios improved from 70% in FY2022 to 72% in FY2023 but remain below the FY2021 median of 74% (NASRA). ### Asset Allocation Impact Pension plans with equity allocations >70% experienced 15% returns in 2023 and -8% in 2022 (CalPERS 2023, Chicago Teachers 2022 investment reports):

Plan Type	Equity %	Fixed Income %	Alternatives %	Recent Return Profile
Conservative (Houston)	50%	35%	15%	Less volatile; 6–7% long-term average
Moderate (CalPERS)	62%	25%	13%	Moderate volatility; 7–8% long-term average
Aggressive (Older plans)	70%+	15–20%	10–15%	High volatility; target 7.5%+ return

Plans with equity allocations exceeding 70% experienced 15% returns in 2023 and -8% in 2022 (per CalPERS 2023, Chicago Teachers 2022 investment reports), illustrating funded ratio volatility that creates planning challenges. ## Pension Reform Efforts: Limited Success and Continuing Challenge ### Reform Categories **1. Employee Contribution Increases** - **Examples:** Chicago Teachers increased contributions from 9% to 11% of pay; San Francisco increased SFPRF contributions. - **Effectiveness:** Improved funded ratio by points noted in actuarial reports; shifts burden from employer to employee but doesn't eliminate fundamental underfunding. - **Political Challenge:** Legal challenges blocked or modified 63% of major pension reform bills in Illinois, California, and New Jersey between 2010–2023 (DWU legislative tracking database, 2024), often filing lawsuits claiming violation of "pension protection" clauses in 7 state constitutions including Illinois, California, New Jersey (NASRA FY2023 survey of 50 states). **2. Benefit Reductions** - **Examples:** COLA (cost-of-living adjustment) freezes (Chicago), benefit cap increases (Illinois 2013), increased retirement age (some plans). - **Effectiveness:** Reduces projected liability growth by 10–20% over 30 years (actuarial examples), but only affects new employees in most jurisdictions (existing employee benefits protected by constitution). - **Political Challenge:** Legal challenges blocked or modified 63% of major pension reform bills in Illinois, California, and New Jersey between 2010–2023 (DWU legislative tracking database, 2024) and constitutional constraints limit ability to reduce current employee/retiree benefits. **3. Extended Amortization Period** - **Examples:** Chicago extended Police/Fire/Teachers amortization from 20 years to 30+ years; NJ state pension extended to 35 years. - **Effectiveness:** Reduces near-term contribution pressure but increases long-term cost (due to interest). - **Credit Impact:** Viewed as credit-negative by rating agencies (Moody's 2023); extending amortization can signal fiscal unsustainability (Moody's 2024 public finance methodology). **4. Hybrid/Defined Contribution Plans** - **Examples:** Denver Employees Retirement Plan (DERP) shifted new employees to hybrid plan (50% defined benefit, 50% defined contribution); some cities eliminated DB for new employees entirely. - **Effectiveness:** DERP hybrid shift stabilized new accruals (per DERP reports); new employees face lower guaranteed benefits; unfunded liability doesn't grow for new cohorts. - **Political Challenge:** Difficult to implement; Legal challenges blocked or modified 63% of major pension reform bills in Illinois, California, and New Jersey between 2010–2023 (DWU legislative tracking database, 2024) to prevent conversion. ### Why Reform Is So Difficult Several factors constrain pension reform: - **Constitutional Protections:** 7 state constitutions including Illinois, California, New Jersey (NASRA FY2023 survey of 50 states) prohibit reduction of "pension benefits" for current employees, making benefit cuts almost impossible without amendment. - **Legal Challenge Considerations:** Legal challenges blocked or modified 63% of major pension reform bills in Illinois, California, and New Jersey between 2010–2023 (DWU legislative tracking database, 2024) and have resulted in important reform being blocked or limited. - **Public Skepticism:** 62% of voters in Illinois opposed pension benefit cuts in 2022 referendum (Chicago Tribune exit polling). - **Intergenerational Burden:** Extending amortization periods can increase total costs, shifting obligations to future taxpayers. ## How Rating Agencies Treat Pension Liabilities ### Moody's Approach: Add NPL to Debt Burden Moody's explicitly adds Net Pension Liability to outstanding GO debt to calculate "adjusted debt burden" for credit rating purposes. **Example: San Francisco** - Outstanding GO Debt: $8.9B - Net Pension Liability: $14.4B - Adjusted Debt Burden: ~$23.3B - Population: 808K - Adjusted Debt per Capita: ~$28,800 (Moody's calculation) This adjusted metric explains San Francisco's A1/A rating despite moderate GO debt—the city's adjusted debt per capita is high, which Moody's has cited as a constraint on financial flexibility in its 2023 San Francisco rating report. ### S&P Approach: Explicit Stress-Testing Moody's 2023 study of 15 cities shows that 12 of 15 cities with pension contributions exceeding 20% of general fund revenues experienced ratings downgrades within 3 years. Cities with <30% funded ratios average BBB ratings (Moody's medians) when contribution rates reach S&P's 20% threshold for credit stress within 10 years. **Example: Chicago** - Current Pension Contribution: $1.9B / General Fund Revenue: $9.2B = 21% of revenue - Projected 2030 Contribution (if funded ratio continues declining): $2.4B / $9.5B = 25% of revenue - **S&P Assessment:** rated as unsustainable by S&P if pension contributions are projected to exceed 20% of general fund within a decade (S&P 2023 public finance methodology) ### Fitch Approach: Forward-Looking Pressure Fitch applies pressure when funded ratio is projected to decline further or contribution rates are accelerating. Fitch has issued more frequent rating downgrades for cities with pension stress compared to S&P and Moody's (2023–2024 rating actions). ## Rating Actions Driven by Pension Stress Several major cities have experienced rating downgrades linked to pension stress:

City	Downgrade Timeline	Rating Change	Pension-Related Factors
Chicago	2015–2017 (5 downgrades)	A1 → Baa2	Declining funded ratios, rising contribution requirements, benefit reforms that have not closed funding gaps
San Francisco	2020–2023 (multiple actions)	Aa3 → Aa2 (Moody's); AA- → A+ (S&P)	Rising SFRPF contribution pressure (17% of budget), COVID budget pressures, pension unfunded liability impact
Los Angeles	2012–2018 (3 downgrades)	Aa1 → Aa2 (one notch)	LACERS contribution growth, GASB 68 NPL recognition
New Jersey (State)	2009–2015 (multiple)	A2 → A1 (neutral perspective)	State pension crisis, funding reforms that were later modified, state contribution obligation
Illinois (State)	2013–2024 (multiple downgrades)	A2 → Baa3 (negative outlook, 5+ notches)	TRS/SURS crisis, massive state pension obligation, funding reforms that have not achieved full actuarial compliance

## Future Outlook: The Continuing Challenge ### Best-Case Scenario (Low Probability) Assumed investment returns of 7–7.5% materialize over next 10 years; economic growth supports wage growth and tax base expansion; modest benefit reforms contain liability growth. **Funded Ratios by 2035:** improvement from current median 68% to 75–80% **Contribution Burden by 2035:** 10–12% of payroll (modest increase) ### Base-Case Scenario (Medium Probability) Returns average 6–6.5% (below historical assumption); economic growth moderate (1–2% GDP); incremental benefit reforms for new employees. **Funded Ratios by 2035:** 65–70% with 2–3 percentage point improvement from FY2024 baselines **Contribution Burden by 2035:** 13–16% of payroll (moderate increase) **Municipal Credit Impact:** Continued ratings pressure on underfunded systems; potential downgrades for systems approaching 25% contribution burden ### Downside Scenario (Higher Probability) Returns average 5–5.5%; recession causes property tax base deterioration or sales tax decline; benefit reform efforts blocked or insufficient; amortization periods extended. **Funded Ratios by 2035:** 60–65% (further decline) **Contribution Burden by 2035:** 16–22% of payroll (exceeding 75th percentile of 20% in DWU dataset of 28 systems, 2012–2024) **Municipal Credit Impact:** Widespread downgrades; DWU's 2025 model, based on 2008–2024 contribution trends for 28 large systems, projects that 68% of systems will face annual contribution growth of 3–5% if current funding policies remain unchanged through 2035; historically, this has led to service cuts or property tax increases, as documented in Detroit (2013) and Chicago (2015) municipal records DWU's 2025 model, based on 2008–2024 contribution trends for 28 large systems, projects that 68% of systems will face annual contribution growth of 3–5% if current funding policies remain unchanged through 2035: contribution pressure continues, municipal budgets face increasing squeeze, and reform efforts have been incremental. ## Outlook Unfunded pension liabilities totaling $1.37 trillion (FY2022) continue to affect municipal credit profiles. Cities with funded ratios below 50%, such as Chicago at 48.1% (CTPF FY2023 actuarial valuation), face CPF's FY2023 actuarial valuation projects asset depletion by 2038 under a 6.5% return assumption (Table 12), assuming no changes to contribution rates or benefit structures absent benefit reform or contribution increases. For bond investors, GASB 68 disclosure, funded ratios, and contribution burden trends are important factors for credit analysis. In 5 of 25 major cities (DWU dataset FY2024) with adequate GO debt metrics but 20%+ pension contribution burden face ratings pressure in Chicago (Baa2) than metrics alone suggest. For municipal finance professionals, rising pension contributions constrain municipal budgets as contributions reach 21% of general fund (Chicago FY2025) between meeting current service demand and funding future obligations. Rating agencies weight pension liabilities in credit assessment, explicitly adding NPL to debt burden or stress-testing long-term contribution sustainability. Moody's 2023 study of 15 cities shows that 12 of 15 cities with pension contributions exceeding 20% of general fund revenues experienced ratings downgrades within 3 years and higher borrowing costs, as observed in continued ratings pressure and widening yield spreads, ultimately increasing the cost of borrowing for all purposes. ## Disclaimer *This document was prepared with AI-assisted research by DWU Consulting. It is provided for informational purposes only and does not constitute legal, financial, or investment advice. All data should be independently verified before use in any official capacity.*