Credit Bulletin: The Status and Outlook of State and Local Government Pensions
Written by Samson Credit Research Associate Bryan Laing, this piece explains the state of pension funding and discusses the challenges facing state and local governments to fulfill their retiree pension benefit obligations. Commentary Highlights:
- If properly addressed, the burden of these obligations will remain manageable for the vast majority of issuers in the municipal market.
- Those issuers that fail to address these challenges or those that face extreme stress from other forces will find servicing these obligations problematic.
- According to the Center for Retirement Research at Boston College, state and local pension funds have an average funded ratio of approximately 72% as of fiscal year end 2013.
- The 72% funded ratio assumes that the average plan will achieve a 7.7% return on their invested assets.
- If returns fall short, the difference will need to be made up by one of two parties: retirees or taxpayers.
- Pension funds have shifted their asset allocation towards riskier and more volatile asset classes in an effort to meet the higher return objectives.
- Between 2006 and 2012, the allocation to alternative investments more than doubled from 11% to 23%, which can potentially increase volatility of returns.
- While the funded ratio tends to get the headlines, whether or not an issuer meets its Annual Required Contribution (ARC) can give even more valuable insight into whether a government is addressing its unfunded obligations or is digging a larger hole.