April 8 Fitch Ratings said on Monday that U.S.
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
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
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
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
"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."