Category Archives: Retirement

Pensions and retiree healthcare challenge some of the largest mass transit enterprises

Source: Thomas Aaron, Timothy Blake, Moody’s, Sector In-Depth, April 11, 2019
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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.

Cities make slow progress in addressing retiree healthcare liabilities

Source: Sunny Zhu, Thomas Aaron, Eric Hoffmann, Leonard Jones, Moody’s, Sector In-Depth, Local government – California, March 18, 2019
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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.

OPEB Brief: The Credit Impacts Of OPEB Obligation Bonds

Source: S&P Global Ratings, March 11, 2019
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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.

Retirement Insecurity 2019: Americans’ Views of the Retirement Crisis

Source: Diane Oakley, Kelly Kenneally, National Institute on Retirement Security, February 2019

From the summary:
New public opinion research finds that Americans are united in their concern about retirement. In overwhelming numbers, Americans say the nation faces a retirement crisis, with Democrats at 80 percent, Republicans at 75 percent, and Independents at 75 percent.

These findings are contained in a new research, Retirement Insecurity 2019: Americans’ Views of the Retirement Crisis, published by the National Institute on Retirement and based on research conducted by Greenwald & Associates.

The key research findings are as follows:
– In overwhelming numbers, Americans are worried about their ability to attain and sustain financial security in their older years.

– Even as the nation remains deeply politically polarized, Americans are united in their sentiment about retirement issues.

– Americans see government playing an important role in helping workers prepare for retirement, but lawmakers in Washington, D.C. just don’t get it. And the new tax law has not helped.

– In contrast to the sentiment about Washington, D.C., efforts by state lawmakers to expand access to retirement accounts for all workers is widely supported by Americans.

– Americans are highly positive on the role of pensions in providing retirement security and see these retirement plans as better than 401(k) plans.

– There is strong support for pension plans for state and local workers, and Americans see these retirement plans as a tool to recruit and retain public workers.

– Millennials are the most concerned about financial security in retirement, and are more willing than other generations to save more.

Related:
Press Release

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…..

ReDefined Contribution Plans: 2018 Defined Contribution Language Study

Source: Invesco, 2019
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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.

Retirement Security: Alternate Price Indexes for Cost-of-Living Adjustments Present Tradeoffs

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.

Illinois (State of) – Pension funding improves, but lags other states due to weak contributions and high payouts

Source: Ted Hampton, Thomas Aaron, Timothy Blake, Moody’s Investors Service, Issuer Comment, State government – Illinois, December 18, 2018
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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.

Local government – Illinois: Ability to absorb pension costs supports exceptional credit quality for some cities

Source: David Levett, Rachel Cortez, Alexandra S. Parker, Moody’s Investors Service, Sector In-Depth, Local government – Illinois, December 14, 2018
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Heavy pension burdens have weakened credit quality for many Illinois cities in recent years, but some Illinois municipalities have maintained exceptional credit profiles.

Local government – New Mexico – Pension burdens will continue to weigh on credit quality, prompting potential reform

Source: Heather Correia, Roger S Brown, Naomi Richman, Alexandra S. Parker, Moody’s Investors Service, Sector In-Depth, Local government – New Mexico, December 18, 2018
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Without changes to New Mexico’s two statewide cost-sharing pension plans, municipalities’ elevated pension burdens will intensify. Although pension contribution rates are set by state statute, if rates increase through legislative reform, local governments will likely be responsible for these cost hikes.