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.
Source: Benjamin J VanMetre, Grayson Nichols, Thomas Aaron, Rachel Cortez, Alexandra S. Parker, Moody’s, Sector In-Depth, February 5, 2019
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…..
Source: Invesco, 2019
From the executive summary:
Despite the great strides plan sponsors have made over the past 30 years in providing participants with in-depth education, guidance and tools, many are still challenged in their ability to engage, inform and motivate employees to save for retirement. Participant communications continues to be named a top-three “area of focus” in 2018,1 as plan sponsors of all sizes continually seek to refine their existing programs.
Based on more than 10 years of in-depth research, focused on the language used when communicating with investors, we believe a disconnect remains between what plan sponsors say and what participants hear. To that end, our 2018 ReDefined Contribution Plans defined contribution (DC) language study focused exclusively on the language of DC plans, specifically testing how participants reacted to various language as it related to their understanding of, and interest in, key aspects of DC plan design and investments.
Together with Maslansky + Partners, we conducted a national survey of more than 800 large-plan participants of various genders, income levels and ages (broken out by millennials, Generation X, and boomers).
We then reviewed our key findings within the construct of our four key principles of credible communication, designed to help plan sponsors communicate more effectively and build trust with participants.
Source: U.S. Government Accountability Office (GAO), GAO-19-218R: Published: Jan 28, 2019. Publicly Released: Jan 28, 2019.
From the summary:
Cost-of-living adjustments can help ensure that federal benefits keep pace with inflation. Using a consumer price index to adjust benefits can help ensure that recipients have enough purchasing power to get what they need.
Social Security and other federal retirement programs generally use one of the four consumer price indexes maintained by the Bureau of Labor Statistics.
We looked at what switching indexes would mean for people’s benefits and federal spending. For example, people who retire earlier or have lower incomes would feel the largest effects of any change.
Source: National Conference on Public Employee Retirement Systems and Cobalt Community Research,January 30, 2019
From the press release:
Fueled by strong investment returns, public retirement systems continued to strengthen their funding levels and fine-tune their assumptions, according to an annual study by the National Conference on Public Employee Retirement Systems.
The 2018 NCPERS Public Retirement Systems Study underscores the success of efforts by pension trustees, managers, and administrators to make steady improvements that enhance the sustainability of pension funds, said Hank H. Kim, executive director and chief counsel of NCPERS. ….
…The 2018 study draws on responses from 167 state and local government pension funds with more than 18.7 million active and retired memberships, actuarial assets exceeding $2.5 trillion and market assets exceeding $2.6 trillion. The majority—62 percent—were local pension funds, while 38 percent were state-wide pension funds. NCPERS conducted the eighth annual study in September through December 2018 in partnership with Cobalt Community Research.
Source: Ted Hampton, Thomas Aaron, Timothy Blake, Moody’s Investors Service, Issuer Comment, State government – Illinois, December 18, 2018
Illinois’ (Baa3 stable) pension funding slightly improved under our adjustments in the year ended June 30, 2018, despite higher unfunded liability figures that the state reported December 7 (see Exhibit 1). Rising interest rates that lowered liabilities, combined with favorable investment returns, drove down the state’s adjusted net pension liability (ANPL) by an estimated 2%-5% in the year. Nonetheless, Illinois’ recent pension funding gains lag those of other states, largely because of its weak contributions and rising payouts.
Source: David Levett, Rachel Cortez, Alexandra S. Parker, Moody’s Investors Service, Sector In-Depth, Local government – Illinois, December 14, 2018
Heavy pension burdens have weakened credit quality for many Illinois cities in recent years, but some Illinois municipalities have maintained exceptional credit profiles.