Moody's: Pension Liabilities Increased for Most of the Largest Localities

WASHINGTON — Pension burdens increased in fiscal 2013 for 31 of the 50 local governments that had the most debt outstanding in that year, Moody's Investors Service said in a new report.

The overall increase in pension burdens for the localities in fiscal 2013 - typically from July 1, 2012 to June 30, 2013 — is moderate, the rating agency said. Moody's adjusted net pension liabilities for the localities in the aggregate increased by 14% to $365 billion in fiscal 2013 from $320 billion the previous year. The median ANPL for the governments increased to 204% of revenues in FY-2013 from 175% of revenues in FY-2012, the rating agency said.

With a gain of $13.1 billion, Los Angeles County had the largest nominal increase in ANPL in FY-2013, to a large extent because of a 154 basis point decline in the discount rate Moody's used. Chicago's ANPL decline of $3 billion, the largest nominal decrease in fiscal 2013, was largely due to a 90 basis point increase in discount rates, Moody's said.

While the Windy City had the largest nominal decrease in ANPL, it had the highest ANPL as a percent of operating revenues in fiscal 2013, at 703%. Chicago was followed by Dallas, Houston, the city of Los Angeles and Jacksonville, Fla. The government with the lowest ANPL as a percent of revenues was Washington, D.C., which had a ratio of 24%, Moody's said.

For some of the largest local governments, pension costs and burdens are a "significant credit challenge," Moody's said. Localities with heavy and growing pension leverage include Chicago and Cook County, Ill., which are among the governments with the most material contribution shortfalls.  In Philadelphia, pension contributions grew to 18% of revenues from 13%, since the city raised its contributions to meet actuarial requirements, the rating agency said.

However, "pension costs are not a substantial burden for a significant number of the largest local governments," Moody's said. Actuarial costs were less than 5% of revenues for 14 of the 50 largest local governments — including the four Texas school districts in the sample, which receive support from the state for nearly all of their pension costs.

The aggregate ANPLs for the 50 largest localities in FY-2013 exceeded the net direct debt for the same group of issuers by 71%, "highlighting the significance of pension leverage facing the local government sector," Moody's said. Much of the difference between ANPLs and debt, it said, is driven by five issuers: New York City, Los Angeles County, Chicago, the city of Los Angeles and Chicago Public Schools.

The fact that some localities' ANPLs increased while others decreased is related to the fact that governments' fiscal 2013 financial disclosures had different pension plan valuation dates spread across the 2012 and 2013 calendar years, Moody's said. When valuing liabilities, Moody's pension adjustments link the actuarial valuation dates to market-based discount rates. ANPLs for the 21 issuers with actuarial valuation dates tied to 2013 discount rates used in Moody's adjustments declined by an average of 13%, while ANPLs for the 29 issuers with valuations for their largest pension plan tied to 2012 discount rates rose by an average of 37%.

Many local governments could have declines in their ANPLs in FY-2014, Moody's said. Available financial reporting for several large multi-employer cost-sharing plans indicate "that ANPLs will generally decline in 2014, driven by very strong investment performance for pension plans with fiscal years ended June 30, 2014," the rating agency said. However, annual returns as of Dec. 31, 2014 generally fell below pension plans' targets, it said.

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