Pensions are expected to pose a continued, and in some cases, rising source of budgetary pressure for local governments, Fitch Ratings found in a new report.
The six-page report, "Local Government Pension Analysis," published Monday, examined the impact of pension liabilities on 1,000 local governments that are rated by Fitch.
There is wide variation among the financial situations of local governments and the ways their pension benefits are managed, but the governments of the greatest concern are those in which the plan's funded ratio is exceptionally low and contribution levels are already high relative to the budget and rising, according to Fitch.
Due to the varying financial situations of the local governments, Fitch Ratings evaluated each government's pension plan individually.
Wide-ranging pension reforms have been underway since the financial downturn in 2008, but in most cases those reforms only affected new hires and the budget benefits accrued only gradually, the report said.
"Where reforms have included current employees or retirees, such as reductions of [cost of living adjustments]or increased contributions, more substantial and immediate reductions in current funding requirements and unfunded liabilities have resulted," the report said.
However, not all pension reforms are beneficial to some local governments and they may result in near-term increases in contributions. Still, Fitch views the reforms in a positive manner because it represents a more realistic approach to addressing a long-term problem.
The report also took into account the new Governmental Accounting Standards Board reporting and accounting rules that are set to go into effect in fiscal 2014 for pension plans and fiscal 2015 for employers.
Fitch said the new standards are a "step in the right direction toward better transparency and comparability of government pension liabilities."
Fitch also said that the new GASB financial reporting standards will result in reporting moderately weaker funded ratios and more limited ability to spread the cost of addressing the liability over time. As a result, the standards are likely to increase public pressure on local policy makers to reform pension plans in order to improve affordability, which Fitch views positively.
The GASB reporting standards "will result in considerably more data to evaluate local governments' pension burden in the context of other long-term liabilities." The rating agency doesn't believe that the pension accounting enhancements will result in a significant level of rating changes.
Last year GASB approved new pension accounting and financial reporting standards, designed to improve states' financial reporting for public pension plans, would increase the total unfunded liabilities reported by many governments, especially for those that already have funding problems.
GASB standards are not mandatory, but state and local governments must follow them to receive a clean audit opinion.