Source: S&P Global Ratings, January 16, 2019
• Volatile markets could affect future pension costs and funding status.
• States might need to offload pension costs to local governments.
• Updated disclosure on reported retiree health care obligations could heighten awareness and spur reform.
• States continue to pass pension reform and sustainability measures in an effort to manage costs and improve system health.
• The combination of environmental, social, and governance obligations and retirement obligations could also stress long-term government costs.
In this economic recovery period since the Great Recession a decade ago, many state and local governments faced rising costs and risk further increases related to funding long-term pension and other postemployment benefit (OPEB) obligations. S&P Global Ratings incorporates a forward-looking view of pension risks to costs in its credit opinion and ratings approach. As we look forward to fiscal 2019, we believe there are five key trends related to pension and OPEB liabilities that could have implications for future government costs: market volatility; states’ offloading of costs to local governments; retiree health care liabilities; pension reform; and the management of environmental, social, and governance (ESG) obligations and retirement obligations.
Source: Daniel Bauer, PA Times, January 4, 2019
Two primary drivers critically impacting both budgetary considerations and public policy processes for the foreseeable future regardless of revenue and service selection are pension liabilities and infrastructure. One tends to be historical in context while the other is futuristic in its scope. Both pension liabilities and infrastructure face headwinds. Both issues transcend interest groups. Both issues potentially advocate fairness and social equity across a broader spectrum of citizens arguably more so than others.
In this continuing series of articles exploring public infrastructure, the combination of unfunded liabilities for both public pension funds (estimates range from US$1-$3 trillion) and infrastructure (estimates ranging from US$1-$5 trillion) conjure up public policy and financial dilemmas constraining even effective discourse. Over the long-term, as difficult as it is to imagine, maybe one unfunded liability poses an opportunity to resolve the other unfunded liability. Can infrastructure be an elixir for long-term pension liabilities? ….
Source: Leon (Rocky) Joyner, Nari Rhee, UC Berkeley Center for Labor Research and Education (Labor Center) and the National Institute on Retirement Security, January 2019
From the abstract:
A new report finds that teacher pension plans play a critical role in retaining educators while also providing greater retirement security than 401(k)-style retirement accounts. Eight out of ten educators serving in the six states studied can expect to collect pension benefits that are greater in value than what they could receive under an idealized 401(k)-type plan. The study also finds that the typical teacher in these states that offer pensions will serve 25 years in the same state, while two out of three educators will teach for at least 20 years.
These findings are featured in new research, Teacher Pensions vs. 401(k)s in Six States: Colorado, Connecticut, Georgia, Kentucky, Missouri and Texas, from the UC Berkeley Center for Labor Research and Education (Labor Center) and the National Institute on Retirement Security. The report is author by Dr. Nari Rhee, director of the Retirement Security Program at the UC Berkeley Labor Center, and Leon (Rocky) Joyner, vice president and actuary with Segal Consulting.
Source: S&P Global Ratings, December 13, 2018
S&P Global Ratings’ U.S. public finance team continues to highlight key pension and other postemployment benefit (OPEB) trends. In 2018, our research has provided comprehensive national and regional insight on these obligations and rising governmental costs to inform a forward-looking view on credit risk. In case you missed them, we have compiled a list of research reports published in 2018 on these topics.
Source: David Levett, Rachel Cortez, Alexandra S. Parker, Moody’s, U.S. Public Finance, Sector In-Depth, 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. Such cities typically have drawn on their strong legal revenue-raising flexibility and high median family incomes (MFI) to support increased pension contributions while maintaining strong reserves. However, credit quality could deteriorate for even these cities if they do not continue to absorb growing pension contributions and keep already high unfunded liabilities in check…..
Source: U.S. Government Accountability Office, GAO-19-208SP, December 13, 2018
From the summary:
What’s the prognosis for the fiscal health of state and local governments across the nation?
Our annual outlook suggests the sector will have an increasingly tough time covering their bills over the next 50 years. Our model shows both revenue and spending will increase; however, spending will rise faster. Revenues may be insufficient to sustain the amount of government service currently provided.
Our model also suggests health care costs will largely drive the spending increases—in particular, Medicaid spending and spending on health benefits for state and local government employees and retirees.
Source: Jean-Pierre Aubry, Caroline V. Crawford and Kevin Wandrei, Center for Retirement Research at Boston College, SLP#62, October 2018
The brief’s key findings are:
– Under traditional accounting rules, the aggregate funded ratio for state and local pension plans in 2017 was 72 percent, largely unchanged from recent years.
– This overall stability, however, masks a growing gap among plans: the average funded ratio was 90 percent for the top third but just 55 percent for the bottom third.
– The plans in the bottom third are in worse shape because, on average, they receive lower long-term investment returns and pay less of their required contributions.
– In addition, all plans face the possibility of a market downturn, which could set back funding for several years.
Source: Anqi Chen, Alicia H. Munnell and Geoffrey T. Sanzenbacher, Center for Retirement Research at Boston College, IB#18-20, November 2018
The brief’s key findings are:
– Recent research has re-documented that the Census Bureau’s Current Population Survey (CPS) understates retirement income.
– Some have wondered if this problem also applies to other surveys and calls into question decades of research that suggest many are ill-prepared for retirement.
– To answer this question, the analysis compared estimates from five commonly used national surveys to administrative data from the IRS and Social Security.
– This comparison shows that:
– the CPS continues to substantially understate retirement income, but
– the other four surveys – the SCF, HRS, SIPP, and PSID – track closely with administrative data, and
– estimates of retirement preparedness using a reliable survey find that roughly half of older households may fall short in retirement.
Source: John G. Kilgour, Compensation & Benefits Review, OnlineFirst, First Published November 1, 2018
From the abstract:
Most state and local governments have historically funded their retiree health care benefits on a pay-as-you-go basis. This has resulted in massive amounts of unfunded liability in many states including the five largest states of California, Florida, Illinois, New York and Texas. Recent accounting and reporting rules changes by the Governmental Accounting Standards Board has made these liabilities more visible and has resulted in more attention being paid to this problem. California has adopted a plan to pay off its huge unfunded retiree health benefit liability by 2044. It might serve as an example for other states with similar problems.
Source: S&P Global Ratings, November 8, 2018
– School revenue increases, driven by a strong state economy, have far outpaced nominal growth in required pension contributions.
– Although the share of district expenditures for pension contributions has increased, and will likely continue to grow, increases to median carrying charges have been sustainable.
– Most districts are more than two-thirds through the scheduled rise in pension contributions, and we expect growth in contribution rates will slow and stabilize over the next several years.
– Districts have not made significant pension-driven cuts to their operations to date, but may reduce salary increases and headcount through attrition moving forward.
– If the state experiences a recession, volatility in state funding could be a more likely source of adverse credit pressure for some districts.