Need grows for Municipalities & Pension Reform

Ask any municipal bond expert what keeps them awake at nights and I guarantee that concerns over the escalating costs of pensions and post-retirement benefits for municipalities is on their top 10 list. The pension landscape is changing; as costs increase, the balance between fiscal, ethical and moral responsibility becomes more precarious. Analysts worry about how the costs will be funded and whether the costs will impact or interrupt debt repayment.

I was afforded the opportunity to moderate an expert panel on pension reform at the National Federation of Municipal Analysts annual conference last week and came away believing that while the problems are large, they are not insurmountable. Here are the key takeaways from the experts.

Politicians tend to think about the next two to four years, which is a not productive for pension reform which is an obligation for the next 30 to 60 years (think “kick the can” mentality). As Robert North, chief actuary for the New York City Retirement Systems said, “I have yet to find anyone who would rather not spend the money on other things.” He noted that public pension financing is asymmetric: the more assets and better funded the pension plan is, the more money politicians are willing spend on enhancing plan benefits. Less assets and lower funded pension plans will result in increased employer contributions and less money in the budget for other services. Most politicians do not want to spend today’s money on a future liability. This leads to some government employers not funding their pension plans at sustainable levels.

Steve Kriesberg, director of collective bargaining and healthcare policy for the American Federation of State, County and Municipal Employees, noted that retiree health spending is projected to rise, but that it is still a relatively modest share of governmental budgets. He also stated that some government reforms that decrease healthcare for government employees may push the costs onto the taxpayer in other ways; such as through state programs for underinsured patients. The labor opinion is that distressed pension situations are relatively few and easy to identify and that bankruptcy is not an effective way to solve the problems.

Perhaps the most encouraging speaker was Steve Toole, head of North Carolina’s Retirement Systems. He noted that pension reform is underway in many states and local government agencies and that the underfunding can be solved with political will and creative planning. Progressive pension plans are changing their amortization periods from a rolling 30-year cycle to six to 12 years (this increases annual required contributions now, but will stabilize funding in the future). Other reform measures include removing annual cost of living adjustment provisions, decreasing discount rates and extending plan vesting periods. Toole noted that we should expect to see upward pressure on plan contribution rates for the short term, but that the improving stock market may reduce that pressure within the next five to 10 years.

We believe that increasing pension and pos-retirement healthcare obligations will continue to have an impact on municipality balance sheets, but that this won’t immediately impact their ability to make bond interest payments. Reform is slowly becoming more palatable to politicians as taxpayers are paying closer attention to benefit costs, which should ease some of the pressure. We will continue to pay close attention to this issue and monitor our client’s municipal bond holdings.