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.
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’ (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.
Heavy pension burdens have weakened credit quality for many Illinois cities in recent years, but some Illinois municipalities have maintained exceptional credit profiles.
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.
Source: Thomas Aaron, Timothy Blake, Moody’s Investors Service, Sector In-Depth, Local government – US, December 18, 2018
Adjusted net pension liabilities (ANPLs) reached new peaks for most of the 50 largest local governments (by debt outstanding) in fiscal year 2017 reporting, due to poor investment returns and low market interest rates. Most governments report pension funding with up to a one-year lag, so favorable investment returns in fiscal 2017 and 2018 will lead to a decline in ANPLs through many of those governments’ 2019 reporting. Nonetheless, pensions continue to drive historically high leverage and elevated annual costs for some governments, and risks from potential pension investment losses are significant…..
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: John G. Kilgour, Compensation & Benefits Review, OnlineFirst, Published January 7, 2019
From the abstract:
In recent years, student loan repayment programs have emerged as the hot new employee benefit. However, their growth has been restricted by their lack of favored tax status. On August 17, 2018, the Internal Revenue Service issued a private letter ruling approving a proposal to create such a program within a 401(k) plan. In a deft piece of reasoning, the private letter ruling provides relief from the so-called “contingent benefit prohibition.” This article examines student loan borrowing, the private letter ruling and its likely consequences and limitations.
Retiree health care is one of the fastest-growing line items in government budgets and, in response, some governments are scrapping their traditional health plans.