State and Local Pensions 101

Source: Rachel Barkley, Morningstar, November 1, 2012

Government pension plans have been in the news often lately, usually attached to dire predictions and inflammatory language. News reports warn about looming unfunded liabilities while many entities are discussing or have implemented pension reforms. In extreme cases, some local governments have even filed for bankruptcy or declared a fiscal emergency in order to amend pension benefits.

Pension liabilities represent significant long-term obligations for governmental entities. In recent years, many governments have been required to increase their annual contributions substantially to fund these future liabilities that have added additional budgetary pressure to already stressed fiscal profiles. This combination makes pensions an important element to understand when determining an entity’s credit quality.

Government actions on pensions also can have a sizable impact on a substantial segment of the national population. According to a recent report from the U.S. Government Accountability Office, more than 27 million employees and beneficiaries are part of state or local government pension plans. These plans represent a considerable portion of retirement planning for these individuals.

Despite the importance of pensions on both the governmental and individual level, they are often poorly understood. With this in mind, Morningstar aims to shed some light on pensions and their potential impact on state and local governments.

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