Source: S&P Global Ratings, May 14, 2019
– Illinois is considering consolidating numerous single-employer public safety plans as a possible remedy to its pension woes;
– While consolidation will likely lower long-term costs through the pooling of resources, we view these as benefits as marginal, and the current proposals leave major pension funding issues largely unaddressed;
– A proposal to reduce statutorily mandated funding to 80% from 90% and allow an additional 10 years to reach this goal would exacerbate existing pension funding weakness among these types of public safety pension plans.
Source: Diane Oakley, Ilana Boivie, National Institute on Retirement Security, Issue Brief, January 2019
From the abstract:
This study analyzes data on specific private sector pension plans (referred to as “multiemployer plans”) to assess the overall national economic impact of benefits paid by these plans to retirees.
We estimate the employment, output, value added, and tax impacts of pension benefit expenditures from multiemployer plans at the national level, and find that the economic gains attributable to private sector multiemployer DB pension expenditures are considerable.
In 2016, $41.8 billion in pension benefits were paid to 3.5 million retired Americans covered by multiemployer plans. The average benefit paid to retirees covered by these plans was $11,935 per year. Expenditures made out of those pension payments collectively supported:
– Nearly 543,000 American jobs that paid nearly $28 billion in labor income
– $89 billion in total economic output nationwide;
– $50 billion in value added (GDP); and
– $14.7 billion in federal, state, and local tax revenue.
The largest employment impacts occurred in the real estate, food services, health care, and retail trade sectors.
Source: Matthew Butler, Joshua Grundleger, Emily RaimesMoody’s, Sector In-Depth, State government – US, April 9, 2019
Recent actions by states signal growing recognition that as pension burdens — unfunded liabilities and annual costs — escalate for K-12 school districts, state assistance will likely need to increase. California (Aa3 positive), Indiana (Aaa stable) and Oregon (Aa1 stable) all recently proposed budget legislation that would boost school funding by making increased payments to teacher pension plans on behalf of districts. The proposals call for one-time contributions to the pension plans rather than recurring pension contribution support on behalf of local districts like Colorado (Aa1 stable) and Michigan (Aa1 stable) have recently committed to provide. Additional states are likely to increase funding for teacher pensions,reflecting the growing credit risks underfunded plans present.
Source: Thomas Aaron, Timothy Blake, Moody’s, Sector In-Depth, April 11, 2019
Pensions and retiree healthcare pose a credit risk for some of the largest mass transit enterprises. Transit enterprises with material unfunded liabilities face budget challenges that can limit capital reinvestment, contribute to rising debt loads and/or lead to lower service levels.
Source: J. Adam Cobb, ILR Review, Volume: 72 issue: 3, May 2019
From the abstract:
Whereas research on corporate governance typically attends to the conflicting interests between shareholders and executives, in practice executives must frequently adjudicate the demands of multiple stakeholders. To investigate how executives cope with the divergent interests of workers and shareholders, the author examines how much firms claim they will earn on the assets in their defined benefit (DB) pension plans. In a DB arrangement, employees forgo wages in the present in order to receive postretirement income, and they rely on executives to properly fund and manage plan assets. Executives, however, can increase the amount they expect the firm to earn on plan assets, which increases firm earnings in the current period but may undermine workers’ retirement security if expectations do not match actual returns over time. The author shows that the influence and interests of employees and shareholders as well as the decision-making schemas of the CEO affect whether executives exercise this discretion.
Source: Sunny Zhu, Thomas Aaron, Eric Hoffmann, Leonard Jones, Moody’s, Sector In-Depth, Local government – California, March 18, 2019
Similar to pensions, other post-employment benefits (OPEB) — principally retiree healthcare — are liabilities that pose credit risks for some local governments. With rising healthcare costs, longer life spans and aging workforces, OPEB costs are escalating rapidly in some casesand unfunded liabilities are becoming a material source of balance sheet leverage. Positively,numerous California (Aa3 positive) cities, including San Jose (Aa1 stable), San Francisco (Aaa stable) and San Diego (Aa2 stable), have taken proactive steps to curb OPEB costs. Few cities have meaningfully reduced these liabilities to date because most cost-containment strategies will take years to provide substantial savings. If unaddressed, rising OPEB expenses threaten to curtail other local government spending priorities.
Source: S&P Global Ratings, March 11, 2019
Other postemployment benefit (OPEB) underfunding of obligations is pervasive across U.S. state and local governments, and costs are likely to continue to rise rapidly. Although, compared with pensions, these obligations may have some more flexibility in how they’re provided, we recognize that funded levels are almost universally lower than those of pensions and could quickly become a challenge to budgets if not addressed. With the implementation of Governmental Accounting Standards Board (GASB) Statements Nos. 74 and 75, many governments are seeing large new OPEB liabilities on their balance sheets that are growing due to insufficient contributions (see “Credit FAQ: New GASB Statements 74 And 75 Provide Transparency For Assessing Budgetary Stress On U.S. State & Local Government OPEBs,” published March 14, 2018, on RatingsDirect). In response, governments are looking to OPEB obligation bonds (OOBs) as a way to address funding concerns. Depending on the circumstances surrounding the OOB, issuance could have rating implications.
Source: S&P Global Ratings, February 19, 2019
(Editor’s note: This publication marks the start of a series of short comments on credit matters of interest in the municipal retirement space. This first “Pension Brief” follows up on our publication one year ago surveying pension reform initiatives across the states (“Recent U.S. State Pension Reform: Balancing Long-Term Strategy And Budget Reality,” Feb. 9, 2018). ….)
…. To face persistent and growing pension challenges, some U.S. state and local governments have looked to develop creative solutions to help mitigate expanding liabilities and bolster wanting asset levels. ….
Source: S&P Global Ratings, February 22, 2019
S&P Global Ratings believes that Illinois’ (BBB-/Stable) executive budget proposal precariously balances the current budget, but punts measures to address fiscal progress to future years. It prioritizes service solvency at the expense of lower pension contributions and does not make meaningful progress toward tackling the $7.9 billion bill backlog or projected out-year deficits….
Source: Thomas Aaron, Timothy Blake, Moody’s, Sector In-Depth, February 20, 2019
Equity market losses in late 2018 will translate into larger than expected pension cost hikes in 2021 for many governments because of equity-heavy investment allocations within their pension systems’ assets. Despite the long-term investment focus of US public pension systems and favorable returns in the past two fiscal years, recent market losses highlight the uphill credit challenge facing governments that rely on high-return/high-risk pension assets to cover a large portion of their pension benefit promises.