(Reuters) – Fitch Ratings said on Monday that local government pension liabilities vary largely for the more than 1,000 local governments it rates, and in some cases it expects the underfunded retirement systems will become a “source of budgetary pressure.”
“The situations that pose the greatest concern remain those in which the plan’s funded ratio is exceptionally low and contribution levels are already high relative to the budget and rising,” the agency said in a special report.
A pension’s funded ratio measures the amount of money a retirement system has on hand against its liabilities. A pension with a ratio of around 80 percent is considered well-funded.
The Pew Center on the States recently estimated that U.S. cities have a combined pension shortfall at least $99 billion.
The underfunding and high costs of late have pushed a few cities toward bankruptcy and into protracted political fights with unions. And as cities such as Stockton, California, file for bankruptcy, many in the $3.7 trillion municipal bond market are wondering if the creditors or the pensioners will be paid first.
Fitch said that local governments’ pension burdens figure into its credit ratings because unfunded pension liabilities “represent a future claim on government resources.”
Earnings provide 60 percent of pension funds’ revenues. When investments tumbled during the financial crisis, local and state governments were pressed to make up for the shortfalls. Many struggled to pitch in the extra money as their own revenues buckled under the strain of the 2007-09 recession.
More than half of local governments send money to state-administered retirement systems, but Fitch said “pension contributions remain a source of budgetary pressure for local governments” regardless of whether they participate in a statewide plan.
Since the downturn, almost all states and most local governments have changed the benefits and financial structures of their pension plans. But “in most cases,” Fitch said, “pension reforms have only affected new hires, in which case the budget benefits accrue only gradually.”
“Where reforms have included current employees or retirees…more substantial and immediate reductions in current funding requirements and unfunded liabilities have resulted,” it added. “However, in some situations these changes are being litigated.”
The new Governmental Accounting Standard Board’s rules set to take effect over the next two years are a “step in the right direction toward better transparency and comparability of government pension liabilities,” the rating agency said, adding it does not expect any major rating changes due to these new pension accounting standards.
Under new GASB standards approved in June, state and local governments will post their net pension liability — the difference between projected benefit payments and the assets set aside to cover them — on their financial statements.
Also under the new rules, pensions with insufficient assets to cover their obligations will have to project lower rates of return on their investments, closer in line to the yield on a municipal bond.
“The lack of consistently available data across plans to which local governments belong …poses an analytical challenge for evaluating local governments,” the agency said. “Fitch expects that GASB’s enhanced pension reporting standards will result in considerably more data to evaluate local governments.”
(Reporting by Caryn Trokie in New York- and Lisa Lambert in Washington- Editing by Leslie Adler)