Category Archives: Pensions

Infographic: Pension liabilities continue to trouble Illinois, Kentucky, Connecticut, New Jersey and others

Source: Moody’s Investors Service, October 3, 2019

Adjusted net pension liabilities (ANPL) declined in states’ fiscal year 2018 reporting due to healthy investment returns in fiscal 2017, though unfunded pension liabilities remain high for some states.

Pension liabilities continue to trouble Illinois, Kentucky, Connecticut, New Jersey and others

Related:
Medians – Adjusted net pension liabilities spike in advance of moderate declines
Source: Pisei Chea, Marcia Van Wagner, Timothy Blake, Nicholas Samuels, Emily Raimes, Tenzing T Lama, Moody’s, Sector In-Depth, August 27, 2019
(subscription required)

Adjusted net pension liabilities (ANPL) spiked in states’ fiscal year 2017 reporting due to poor investment returns in fiscal 2016, according to our state pension medians data. States typically report their pension funding levels with a one-year lag. Thus, favorable investment returns in fiscal 2017-18 will lead to a decline in pension liabilities in fiscal 2018-19 reporting.

Adjustments to Pension and OPEB Data Reported by GASB Issuers, Including US States and Local Governments Methodology
Source: Moody’s, Cross Sector Methodology, October 7, 2019

Credit FAQ: How S&P Global Ratings Will Implement Pension And OPEB Guidance In U.S. Public Finance State And Local Government Credit Analysis
Source: S&P, October 7, 2019
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On Oct. 7, 2019, S&P Global Ratings published “Guidance: Assessing U.S. Public Finance Pension And Other Postemployment Benefit Obligations For GO Debt, Local Government GO Ratings, And State Ratings Methodology.” Here, we answer the most frequently asked questions from investors and other market participants.

Elsewhere, we have also provided an overview on our approach to U.S. state and local government pensions within the context of our three government criteria: See “Credit FAQ: Quick Start Guide To S&P Global Ratings’ Approach To U.S. State And Local Government Pensions,” published May 13, 2019.

U.S. State Pension Reforms Partly Mitigate The Effects Of The Next Recession Primary Credit
Source: Carol H Spain, S&P, September 26, 2019
(subscription required)

Table of Contents:
• Average State Funding Levels Plateau With Notable Exceptions
• Many States Continue With Pension Reforms, Avoiding Backward Measures
• Most States Still Fall Short Of Minimum Funding Progress
• Despite Reforms Despite Improved Assumptions, Plans Remain Vulnerable To Market Volatility
• Demographics Influence The Funded Ratio And Budgetary Vulnerability
• Pension Costs Remain Affordable For Most States, With Notable Exceptions
• Policy Decisions, Not Markets, Will Likely Pose Greatest Future Risks
• Survey Methodology
• Related Research

Despite investment gains in 2018, U.S. states have made relatively slow progress since the Great Recession in improving funded ratios, with S&P Global Ratings’ most recent survey data indicating that the average weighted pension status across state plans was 72.5% compared with 83% in 2007. However, looking at the funded ratios alone falls short of understanding whether or not states have made progress toward improving the overall pension funding picture. Indeed, poor investment returns in select years and maturing pension plan populations have stunted state funding progress. Also, in the years immediately following the Great Recession, many states had reduced plan contributions as a short-term means of balancing budgets, resulting in funding setbacks from which many have yet to recover.

However, in recent years, many states have made conservative changes to actuarial methods and assumptions that, while hindering actuarial funding ratios, show a more realistic assessment of market risk tolerance for states, thus better enabling them to make funding progress. We have also witnessed that many states have learned lessons from funding discipline mistakes over the past ten years and better understand sources of pension liability and costs, and have therefore demonstrated a commitment to actuarially based funding. In this sense, states may be better prepared heading into the next recession despite weaker funded ratios. Yet, in our view, despite some progress, many plans’ current contributions, discount rate assumptions, and investment allocations still fall short of fully mitigating the market volatility that increasingly appears to lie ahead….

US Public Pension Landscape Series – July 24, 2019

Source: Thomas Aaron, Timothy Blake, Moody’s, Sector In-Depth, June 24, 2019
(subscription required)

Many US states and local governments, though certainly not all, face heightened credit challenges stemming from exposure to pension obligations, resulting in a highly varied and complex landscape. The severity of public pension challenges can differ substantially between, and even within, states.

Unfunded liabilities in many cases have reached historic highs, rising costs increasingly pressure some budgets, and aging demographics leave government finances increasingly susceptible to pension asset volatility. Yet in some cases, low or declining levels of pension risk bolster the credit profile of a given state or local government.

Governments grappling with pension challenges must often navigate legal protections for employee benefits that can limit reform options. However, litigation on a variety of pension reforms continues to work its way through courts across the country, offering the potential for precedent-setting decisions.

This series provides a state-by-state, in-depth review of the key issues related to pensions facing state and local governments. ….

State listing:
California
Colorado
Connecticut
Florida
Illinois
Louisiana
Minnesota
New York
Ohio
Oregon
Pennsylvania
Tennessee
Texas
Wisconsin

The Evolution of Private Sector Retirement Income From Defined-Benefit Pensions to Target-Date 401(k) Plans

Source: John G. Kilgour, Compensation & Benefits Review, OnlineFirst, Published July 19, 2019

From the https://doi.org/10.1177/0886368719864480:
Traditional employer-sponsored defined-benefit pension plans in the private sector that provided lifetime benefits have declined precipitously since 1985. They have been largely replaced by Section 401(k) plans in which investment control, market risk and longevity risk have been transferred from the employer to the participant. Most participants opted for the low-yielding money market plan default option, which proved inadequate for providing viable retirement income. The Pension Reform Act of 2006 made two important changes to 401(k) plans: (1) allowed automatic enrollment and (2) allowed target-date funds as a “qualified default investment alternative.” This article examines the evolution from defined-benefit pensions to target-date funds and the closely related collective investment trusts.

Adjustments to US State and Local Government Reported Pension Data: Proposed Methodology Update

Source: Thomas Aaron, Marcia Van Wagner, Timothy Blake, Moody’s, Request for Comment, July 10, 2019
(subscription required)

In this Request for Comment, we propose a number of changes to the Adjustments to US State and Local Government Reported Pension Data cross-sector rating methodology published in December 2017. Under our proposed changes, we would add descriptions of how we calculate the pension asset shock indicator and how we adjust other post-employment benefits (OPEB). The OPEB adjustment relies on information now required to be reported by issuers under Governmental Accounting Standards Board (GASB) Statements 74 and 75. We also propose to make some editorial changes to enhance readability.

US Public Pension Landscape Series

Source: Thomas Aaron, Timothy Blake, Moody’s, Sector In-Depth, June 14, 2019
(subscription required)

Many US states and local governments, though certainly not all, face heightened credit challenges stemming from exposure to pension obligations, resulting in a highly varied and complex landscape. The severity of public pension challenges can differ substantially between, and even within, states.

Unfunded liabilities in many cases have reached historic highs, rising costs increasingly pressure some budgets, and aging demographics leave government finances increasingly susceptible to pension asset volatility. Yet in some cases, low or declining levels of pension risk bolster the credit profile of a given state or local government.

Governments grappling with pension challenges must often navigate legal protections for employee benefits that can limit reform options. However, litigation on a variety of pension reforms continues to work its way through courts across the country, offering the potential for precedent-setting decisions.

This series provides a state-by-state, in-depth review of the key issues related to pensions facing state and local governments…..

State Listings:
California
Colorado
Florida
Illinois
Louisiana
Minnesota
New York
Ohio
Oregon
Pennsylvania
Tennessee
Texas
Wisconsin

Kansas (State of) – Retained pension funding, vetoed tax relief are credit positive

Source: Matthew Butler, Moody’s, Issuer Comment, June 6, 2019
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On May 29, the Kansas legislature voted to override several spending vetoes that Governor Laura Kelly made when she authorized the state’s fiscal 2020 budget. One of the vetoes was of a supplemental payment to the Kansas Public Employees Retirement System (KPERS). The lawmakers’ action preserves a $51 million supplemental contribution to KPERS, a credit positive for the state. At the same time, the legislature failed to override a veto of an income tax relief bill that would have cost the state an estimated $240 million over three years. This is also credit positive, because it reduces the amount of budget reserves Kansas will use to make the supplemental pension payment, increase school funding and more quickly retire an internal loan.

Illinois Pension Consolidation: A Path Forward Or A Road To Nowhere?

Source: S&P Global Ratings, May 14, 2019
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– 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.

Pensionomics 2018: Measuring the Economic Impact of Multiemployer DB Pension Expenditures

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.

California: Revised budget increases funding for school districts and community colleges, a credit positive

Source: Helen Cregger, Eric Hoffmann, Leonard Jones, Moody’s, Sector Comment, Public K-12 school districts and community colleges, May 22, 2019
(subscription required)

On May 9, California Governor Gavin Newsom released a revised version of the state’s fiscal 2020 budget, which includes a substantial increase in minimum funding levels for K-12 public schools and community college districts, a credit positive. The new budget also benefits K-12 schools with the state agreeing to kick in added funds to help school districts with pension payments to the California State Teachers’ Retirement System….