Dec 11 Municipal bonds that states and local
governments use to pay for some of their public pension
obligations rarely improve the issuer's credit quality, Moody's
Investors Service said on Tuesday.
"If bond proceeds substitute for annual contributions to
pension plans or are used to pay pensioners, we consider it a
deficit borrowing and would view the financing as credit
negative," Marcia Van Wagner, the senior Moody's analyst who
wrote the report, said in a statement.
Cities and counties in the United States seem to have gotten
this message, even though many face big unfunded pension
liabilities. Despite some large state pension obligation bond
deals in 2012, issuance has declined from 2011.
In the first seven months of 2012, there were just 14 such
deals worth $604 million, compared to $4 billion issued in 2011,
according to Thomson Reuters data.
The negative credit implications hold especially true if the
borrowing is large relative to the issuer's budget, for example
over 5 percent. The bonds are also viewed negatively if they are
part of a pattern of one-time fixes or don't come alongside a
plan to restore budget stability, Moody's said.
"Pension bonds are often a red flag associated with greater
rigidity of long term obligations, failure to find sustainable
solutions to pension funding and a pattern of pushing costs off
into the future," said Van Wagner.