LOS ANGELES - The volatile stock market has hurt the asset performance of large pension plans, a signal that fiscal year 2016 returns may fall short of assumed targets for the second consecutive year, Moody's Investors Service said in a report.
The analysis, released by Moody's Thursday, suggested that fiscal 2015 and 2016 results are likely to undo the pension plan funding improvements that municipal governments made in 2013 and 2014. Pensions have been a persistent source of credit pressure for state and local governments, particularly in recent years, a situation Moody's analysts expect will continue. The Moody's report was based on a sample of net pension liability disclosures from 56 public pension plans.
"In aggregate, a 56-plan sample of public plan reported net pension liabilities (NPLs) increased by roughly 17% in fiscal 2015, driven largely by investment returns that fell below plan assumptions," Moody's said. "Using the same sample of recent accounting disclosures, we project that fiscal 2016 net liabilities on a reported basis will increase by an additional 10% in our most optimistic (5% return) scenario and by 59% in our most pessimistic scenario (-10% return)."
Fewer than half the plans in the rating agency's sample are receiving government pension contributions at a level that will reduce liabilities, Moody's found. The agency expects the same to hold true for fiscal 2016, and underfunded plans will continue to experience liability growth even if investment returns meet expectations.
Though the general trend is negative, Moody's found pension challenges vary for municipal governments, as many have parlayed strong economies into well-funded plans, or have enacted reforms to put their plans on a more solid footing. Pension reform is often difficult due to the legal hurdles involved in altering the terms of existing employer-employee agreements.
"The ability of state and local governments to absorb high and/or growing levels of pension risk is tied to their ability to generate and sustain future growth of tax revenues and to control non-pension expenditures," Moody's said.
