Richard Howe/flickr

Chicago and New York rank at the bottom of a new analysis of fiscal strength based primarily on data from 2015 financial reports issued by the cities themselves.

The analysis includes 116 U.S. cities with populations greater than 200,000. See the full rankings here.

Chicago’s position at the bottom of the ranking is no surprise to anyone who follows municipal finance.

The Windy City has become a poster child for financial mismanagement, having suffered a series of ratings downgrades in recent years.

Aside from having thin reserves and large volumes of outstanding debt, Chicago is notorious for its underfunded pension plans.

For example, the city’s Municipal Employees' Annuity and Benefit Fund (MEABF) reported $4.7 billion in assets and $14.7 billion of actuarially accrued liabilities at the end of 2015, representing a funded ratio of just 33 percent.

The actuarial calculations rely on a controversial practice of discounting future benefits at a rate of 7.5 percent, which is the assumed return on the fund’s portfolio return. If a more conservative assumption was employed, MEABF’s liabilities would be higher and its funded ratio lower.

Because the ranking is based on 2015 financial audits — you can see the full data behind the scores here — it does not take into account more recent news.

Last summer, Mayor Rahm Emmanuel announced a plan to resolve MEABF underfunding by raising water and sewer rates and increasing employee contributions to the system. Because these changes don’t take effect until this year, it will take some time for them to impact Chicago’s audited financial statements and their fiscal health scores.

While Chicago’s place at the bottom of the list is unsurprising, New York City’s position — just one step above — was unexpected. An extended bull market and soaring real estate prices have pumped money into the Big Apple’s coffers. Total municipal revenues rose from $60 billion in 2009 to $81 billion in 2015. But the city has been spending the money almost as quickly as it has been coming in.

At the end of its 2015 fiscal year, the city’s general fund reserves amounted to just 0.67 percent of expenditures — well below the Government Finance Officers Association recommendation of 16.67 percent (equivalent to two months of spending). A city’s general fund is roughly analogous to an individual’s checking account.

New York City also carries a very heavy debt burden. According to a report issued by City Comptroller Scott Stringer, New York’s per capita debt greatly exceeds that of all other large U.S. cities, and is even 50 percent higher than that of Chicago.

But the comptroller’s report only focuses on bonded debt. Government financial accounting standards require cities to report other long-term obligations such as pensions, compensated absences for municipal employees (accrued sick and vacation leave payable at retirement) and “other post-employment benefits” (or OPEB).

New York Mayor De Blasio attends a news conference about the two NYPD police officers who were fatally shot in the Brooklyn borough of New York Thomson Reuters

It is New York’s OPEB obligation that really sets the Big Apple apart. In 2015, the city’s OPEB liability was $85 billion — roughly equivalent to its bonded debt.

The large OPEB liability is driven by the size of the city’s workforce and the relatively high cost of health care in New York. According to its most recent OPEB Actuarial Report, the city is providing retiree health benefits to 222,000 retirees, while another 315,000 current and separated employees are potentially eligible for future benefits. In 2015, benefits per retiree ranged as high as $17,000 a year (for workers who were not yet Medicare-eligible and who had eligible dependents).

High debt burdens and insufficient general fund reserves are associated with episodes of fiscal distress, which are marked by employee furloughs, layoffs and, in extreme cases, bond defaults and bankruptcy filings. Still, if New York City continues to record strong revenue growth, it can shoulder its sizeable obligations.

With the stock market perking up in the aftermath of Donald Trump’s election victory, the odds of a fiscal crisis in the near term appear long — but a bear market could place the city in jeopardy.

Such was the case back in 1933, when New York City briefly defaulted on its municipal bond debt. In the aftermath of the stock market crash and the Great Depression, city revenues declined amidst a rash of property tax delinquencies.

The city faced a second fiscal meltdown in 1975, when the federal government refused to provide a bailout and the state declared a moratorium on certain city bond payments. Although the default occurred during another bear market, the proximate cause of the crisis was rising interest rates.

At the time, the city relied heavily on short-term debt, which became more difficult and expensive to roll over as inflation spiked in the early 1970s.

Aside from New York and Chicago, three other cities received scores below 40: Reno, St. Louis and Toledo. All three of these cities had relatively small general fund balances and high debt burdens.

One perfect score

At the other end of the spectrum, with a perfect score of 100, is Irvine, California — a rapidly growing “edge city” south of Los Angeles. Rising revenues have resulted in a series of budget surpluses that have bulked up the city’s reserves.

In 2015, the city reported over $700 million of cash and investments on its balance sheet, more than enough to fund two years of government spending. Irvine is also unique among large American cities in that it has no outstanding bond obligations. All municipal borrowing in Irvine is done by special districts, which levy supplemental taxes to service their debt.

Two cities in California’s Inland Empire, Fontana and Moreno Valley, took the second and third spots. Both cities have modest debt loads and large general fund reserves.

These high-ranking cities are both located within a short drive from San Bernardino, which filed for bankruptcy protection in 2012. Their presence near the top of the list is testimony to California’s economic recovery, but it also suggests that sound financial management practices make a difference.

Although Fontana and Moreno Valley faced similar challenges to San Bernardino during the Great Recession, both of these cities avoided a fiscal crisis – apparently because officials showed greater discipline with respect to spending and borrowing.

Chicago Mayor Rahm Emanuel (L) announces that he is appointing Eddie Johnson (R) as the Interim Superintendent of the Chicago Police Department, during a news conference in Chicago, March 28, 2016. Reuters/Kamil Krzaczynski

Keep in mind, though, that it is not necessary for a city to have a near-perfect score to be regarded as a good fiscal steward. Any score higher than 70 could reasonably be interpreted as a level of fiscal health sufficient to justify a triple-A credit rating.

Bankruptcies and Delinquencies

The universe of cities we analyzed includes three that filed for bankruptcy since the Great Recession: Stockton and San Bernardino, which filed in 2012, and Detroit which filed in 2013. Both Stockton and Detroit have emerged from bankruptcy, while San Bernardino is close to doing so.

All three cities have scores in the middle of the pack. Detroit and Stockton benefited from court-mandated reductions in their debt, while San Bernardino has been running general fund surpluses during its extended time in bankruptcy.

Of the 116 cities we analyzed, three had not published 2015 Comprehensive Annual Financial Reports by the end of 2016. One of them, Baltimore, will publish its 2015 CAFR in early 2017, which is quite late.

Federal regulations require state and local governments that receive over $750,000 in federal funds to file audited financial statements no later than nine months after their fiscal year end. Since Baltimore’s fiscal year ends on June 30, it should have filed its 2015 CAFR no later than March 31, 2016.

See the full ranking of 116 cities here. To see the data behind the scores, please visit the new Center for Municipal Finance website.