Public pension funding is the most important issue weighing on the minds of municipal bond analysts, according to a Janney Capital Markets survey of 162 analysts.
Nearly four in 10 (39 percent) of the analysts don't think the municipal bond market, and ultimately the credit quality of local governments, has fully recovered from the last recession.
No issue registered nearly as close to pensions when asked what the most important issue would be for municipal and state governments going forward.
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"It's 2015, we're multiple years out of the recession and there are still several state and local governments that are experiencing structural imbalances and their pension funding levels are still inadequate, or I'd say very inadequate," Tom Kozlik, an analyst with Janney and author of the report, said in an interview with Government Executive.
New accounting standards, GASB 67, which has already been implemented, and GASB 68, which will go into effect later this year, are also on analysts' minds.
The standards insist on greater transparency, requiring pension plans to report a "depletion date" — when funds are expected to be insufficient to cover obligations to existing participant. Also, pensions will be obligated to report a Net Pension Liability.
Moody's said recently that the new requirements will have a modest impact on ratings actions, as analysts have been pricing funding shortfalls into their valuations of pensions affect on municipal bonds.
On the other hand, in March, the agency said a review of 54 plan statements that have complied with GASB 67 for the first time revealed that only 13 sponsors have made contributions to reduce net pension liabilities.
A report from the Center for Retirement Research said state and local pensions had over $1 trillion of unfunded liabilities in 2013 and only about 72 percent of the assets needed to meet future obligations. The figures, however, are skewed by a handful of states with gaping shortfalls, it said.
The practice of underfunding pension obligations is dragging down the credit quality for several state and local governments, said Kozlik.
"It's going to be even worse after the next recession," he predicted.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
