Pension underfunding policy lands Birmingham a downgrade
Birmingham, Alabama, saw its general obligation bond rating lowered one notch after underfunding its major pension plan for a decade.
Fitch Ratings said it downgraded the GO rating to A-plus from AA-minus because of the city’s policy of funding the actuarially required contributions below recommended levels. The rating outlook was revised to stable from negative at the lower rating.
The action affected $288.5 million of outstanding GOs as of June 30, 2018.
“Fitch views the city's underfunding of the actuarially determined pension contribution as a form of deficit financing or liability deferral that essentially creates larger future obligations on the operating budget,” said analyst Parker Montgomery. “Payment of the full ADC would, at a minimum, help stem the tide of climbing pension costs in the future.”
The city’s fixed costs for debt service, actuarial pension contributions, and other post-employment benefits were moderate at 17% of governmental spending in fiscal 2018, “but the trajectory of actual pension contributions is a more material credit concern,” Montgomery said.
The city's largest pension plan, the Retirement and Relief System, had a net pension liability of $723 million as of June 30, 2018. A decade ago, the plan was nearly 90% funded with a liability of less than $100 million, according to Fitch.
The Retirement and Relief System is a multi-employer agency defined benefit plan that covers all eligible civil service employees, appointed and elected. It had 7,501 retired and active members and those entitled to benefits but not yet receiving them, the 2018 comprehensive annual financial audit said.
“Fitch believes the city has the financial capacity to annually absorb the full actuarial pension contribution,” said Montgomery, who added that it would have required an additional $16 million annually or 3% of spending on average between fiscal years 2015 and 2018.
The city's commitment to increase its employer contributions for the Retirement and Relief Plan to 9% of compensation in fiscal 2020 from 7.5% in fiscal 2018, an estimated $3 million increase, is far below what the actuary recommends, he said.
“The city's actuary, Segal Consulting, now projects the plan will spend through its trust assets within 28 years, a depletion date that was pushed out only after the city incorporated less conservative assumptions in the plans, including increasing the investment rate of return to 7.5% from 7%,” Montgomery said.
When asked to comment on the downgrade, Birmingham Communications Director Rick Journey sent The Bond Buyer a message provided to city employees Tuesday that said Mayor Randall L. Woodfin has publicly identified the pension fund as an issue that has been developing over the last 18 years.
“The administration has made this a priority to resolve and is currently working closely with the pension board to identify a long-term solution,” the message said. “Please note, the downgrade has no impact on day-to-day operations or your employment with the city.”
Birmingham is in north-central Alabama and is the county seat of Jefferson County. It is the largest city in the state even though its population is on the decline. In 2017, the U.S. Census Bureau estimated the number of city residents at 210,700. In 2010, the population was 212,237.
The 2018 CAFR said the city is “experiencing substantial development and redevelopment” with new construction and repurposing existing buildings. Multi-family projects were underway, as were the construction of two new hotels, new retail and entertainment projects, and existing businesses were expanding.
In October, Amazon broke ground on a $325 million fulfillment center in neighboring Bessemer that is expected to employ about 1,500 workers when completed.
Moody's Investors Service assigns an Aa2 rating to the city’s GO bonds, while S&P Global Ratings rates them AA.