Unfunded pension, OPEB liabilities of state governments rose in 2016, S&P Global reports

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WASHINGTON – State government unfunded liabilities for employee pensions and other post-retirement benefits grew nationally in fiscal 2016, S&P Global said in two reports released Wednesday.

Pension pre-funding dropped to 68% in fiscal 2016 compared to an average of 75% the year before.

Unfunded other post-retirement benefits (OPEB), such as for health care, grew by 3.9% in fiscal 2016, which S&P Global said it considers to be “somewhat high” even though it represented slower growth than the 12% its survey found the year before.

Tax-supported debt state debt, meanwhile, dropped by 0.4% at the same time, S&P said.

In fiscal 2016, fixed-cost liabilities for the average state consisted of 41% for unfunded pensions, 33% for other post-retirement benefits and 26% for debt repayment of bonds issued for infrastructure and other purposes.

The 26% share for debt repayment represented a four percentage point drop from 30% a year earlier.

“We’ve been noting over the last few years in our debt survey that debt issuance has remained relatively flat,” Sussan Corson, one of the authors of the two reports and a director at S&P Global, U.S. Public Finance, told The Bond Buyer. “It appears infrastructure spending is not keeping track with historical levels.”

The combined pressure of growing pension liabilities and other post-retirement employee benefits is squeezing the ability of states and localities to repair and upgrade infrastructure.

“In general, we’re just noting that these fixed costs continue to rise,’’ Corson said. “In the context of this slow revenue growth, we feel it will continue to put pressure on budgets.”

Most states don’t pre-fund post-retirement benefits for health care, prescription drugs and dental coverage for retired state and local workers. Nor do they have legal requirements for pre-funding. That contrasts with pension plans, which are required to be pre-funded in many states, the report said.

Instead, many states pay for OPEB on a pay-as-you-go basis, using current year revenues.

S&P found that some states, even those with trust funds for OPEB, did not make contributions in 2106. Ten states – Arizona, Wyoming, Florida, North Dakota, Maryland, Georgia, North Carolina, Arkansas, Delaware and Texas -- had an increase of 10% or more in their unfunded post-retiree benefits. S&P said most of that was attributable to a change in actuarial valuations.

The implementation of updated Governmental Accounting Standards Board Statements Nos. 74 and 75 was one of the factors and will likely play a role in funding liabilities for some states next year, S&P said.

Oregon’s funding ratio of 70.9% for OPEB was the highest in the nation in fiscal 2016, S&P said, followed by Arizona at 60.9%. Alaska was third at 58% following an extraordinary $3 billion contribution in fiscal 2015 from the state’s constitutional budget reserve fund.

State governments have found it easier to eliminate or trim OPEB, said Jillian Legnos, primary author of the OPEB report. She noted that South Dakota eliminated all OPEB four years ago, but efforts by states to reduce pension benefits have been subjected to legal challenges.

Only five states – Alabama, Kansas, Michigan and Virginia – experienced an increase in pension plan funding levels in fiscal 2016.

Minnesota experienced the biggest drop because it adopted a single GASB discount rate of 4.17% compared to the 7.9% assumed rate of return it used a year earlier.

Other states such as Oregon and Hawaii experienced significant drops, S&P said, because they adopted a more
conservative assumed rate of return on their investments.

The states with the worst funded pension plans were New Jersey (30.93%), Kentucky (31.21%), Illinois (35.64%), Connecticut (41.38%) and Hawaii (51.28%).

The best funded pension plans were Wisconsin (98.2%), South Dakota (96.89%), New York (93.55%), Tennessee (88.04%) and North Carolina (87.23%).

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