NEW YORK - A broad deterioration in funding levels for public sector pensions is adding to fiscal pressure on some state and local governments and could contribute to negative rating actions for some issuers in the next several years, says Moody's Investors Service in a new report.
"The reduction in funding levels is largely driven by significant investment losses in pension plans throughout 2008 and early 2009 -- losses which for certain issuers came on top of longer-term demographic pressures," said Moody's Vice President Douglas Benton. "The problem may be exacerbated for governments that deferred pension contributions during periods of budgetary stress."
Benton said greater credit stress will be felt by both the government issuers that entered this cycle with marginal funding levels as well as by those that face inflexible regulatory or legal pension funding requirements. Despite the recent strong performance of the equity markets since March, he said, asset losses from earlier periods continue to weigh on plan asset valuations.
"Historically, stock market volatility posed pro-cyclical economic risks," said Benton. "Funding pressure could partially ease if there is a continued rapid rise in equity market values and rising rates lead to actuarial reduction in accrued liabilities through the application of a higher discount rate."
He said the evaluation of the strength or weakness of a rated issuer's retirement system begins with a review of the extent to which a government has set aside resources to meet its pension obligations as part of its "funded ratio."
“Our focus is on four key factors: the level of benefits, investment results, reporting assumptions, and the constitutional and legal requirements such as those covering funding levels and funding mandates," said Benton. "Additional research will develop these findings here and focus on specific pension issues and their role in the rating process."
