State and local government – US: Retiree benefits drive growth in fixed costs, posing greater challenges than debt

Source: Benjamin J VanMetre, Grayson Nichols, Thomas Aaron, Rachel Cortez, Alexandra S. Parker, Moody’s, Sector In-Depth, February 5, 2019
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Fixed costs — the combination of debt service, pension contributions and retiree healthcare— continue to rise for many US state and local governments. While retiree benefits (pensions and healthcare) will continue to drive this trend, the growth level is heavily dependent on unpredictable factors such as pension investment performance and workforce demographics. Debt service costs, on the other hand, are largely stable and unlikely to increase materially,continuing the trend of the last decade. Still, total fixed costs create budgetary challenges for some governments, potentially affecting their ability to deliver core services, a dynamic also known as “crowd-out” risk…..