December 11, 2012 / 5:51 PM / in 5 years

Pension bonds risky for state and local governments-Moody's

Dec 11 (Reuters) - 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.

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