BRADENTON, Fla. – A significant increase in Birmingham, Ala.'s pension liabilities led Fitch Ratings to cut the city's issuer default and bond ratings by one notch to AA-minus.
The downgrades from AA affect $455 million of outstanding general obligation debt and $67 million of civic center revenue bonds issued by the city's Commercial Development Authority, Fitch said Friday.
Fitch also revised the rating outlook to negative from stable.
The actions stem from a combination of credit factors and the application of Fitch's revised criteria for U.S. state and local governments last year, according to analyst Michael Rinaldi.
Birmingham's "updated pension disclosure depicts a significant increase in the city's net pension liability and the revised criteria highlights risk associated with the city's pension plans from the standpoint of long-term affordability and limitations on spending flexibility," he said.
The city's pension actuarially determined contribution for fiscal 2017 was $44 million or 8% of spending compared to fiscal 2013 when the ADC was $25.5 million or 5% of spending, Fitch said.
"The increase reflects various factors including market performance but also the city's gross underfunding of the ADC, which Fitch considers a form of deficit financing." Rinaldi said.
From fiscal 2013-2016 the aggregate contribution to the city's pension plans totaled approximately $75 million compared to the actuarial recommendation of $133 million.
Rinaldi said the city is evaluating several reform options, although neither will close the ADC funding gap and Fitch expects the fixed cost burden to continue to rise sharply.
Birmingham, the most populous city in Alabama, has three single-employer defined benefit pension plans: the Retirement and Relief System, the Firemen's and Policemen's Supplemental Pension System, and the Unclassified Employee's Pension and Relief System.
The estimated Fitch-adjusted net pension liability for the Firemen's and Policemen's Pension System is less than $65 million while the Unclassified Employee's Pension System – with only 16 total participants - is fully funded, according to Fitch.
The Retirement and Relief System, the city's largest pension plan covering all eligible civil service employees and appointed employees, had a liability of $1.04 billion in fiscal 2016 up from $548.3 million in 2015, according to the city's comprehensive annual financial report.
The CAFR said the increase in liability was primarily due to the decrease in the market interest rate used to compute the present value of the liability and decrease in the discount rate to 4.13% in 2016 from 5.24% in 2015.
Fitch said the city's actuary, the Segal Co., projects that in 23 years the Retirement and Relief System's plan assets will no longer sufficient to satisfy benefit obligations.
While the city expects to increase the eligibility age, lower the benefit multiplier for new hires only, and phase-in a modest increase in annual contributions, Fitch said absent higher contributions and more meaningful benefit changes that it expects the city's long-term liability burden to approach the 40% ratio.
Birmingham maintains a strong financial position and high reserves, Rinaldi said, although about 80% of the general fund budget is financed through a combination of economically sensitive taxes and charges, such as the local sales tax, as well as occupational and business taxes.
Property taxes accounted for less than 10% of budgeted general fund revenue in fiscal 2017, and are subject to state legislative approval.
