BRADENTON, Fla. – After 15 years covering state and local credits, becoming an expert in public pensions during that time, John Sugden has hung up his analytical hat at S&P Global Ratings.
Sugden traded his duties as an analyst and manager for S&P while living in Miami to become the chief investment officer for a private trust company. His last day was July 12.
“Working on munis was interesting because it was like peeling an onion,” said Sugden, 44. “Every time I thought I finally knew everything, I was able to pull back another layer and find a whole new world, with new and different analytical challenges.
“There was always something to be learned, and that remained true from my first day to my last.”
That’s what happened in January, he said, when his analysis uncovered underlying problems in Kentucky’s pension system, one of the worst-funded in the country with more than $62 billion of combined unfunded liabilities.
Payroll growth and mortality rates underpinning assumptions in Kentucky’s plans showed that the state’s expectations were “well out of line with actual growth,” he said. As a result, S&P placed a negative outlook on the state’s A-plus issuer credit rating.
A state study released in May revealed that a level percentage of payroll funding was used to determine the state’s annual required contribution between 2005 and 2016, when the state’s workforce actually declined. The assumption helped spur a $25.5 billion increase of unfunded liabilities.
“When these aggressive assumptions were finally recognized,” Sugden said, “the cost was significant.”
While the rate of return is important in pension assumptions, he said there are others such as mortality rates and payroll growth that can have a significant impact on the cost of pension obligations.
The most serious issues confronting state and local governments today are the long-term fixed costs associated with pensions, other post-employment benefits, and Medicaid, Sugden said.
“In this new, low-revenue growth environment, pro-growth investments such as education and infrastructure are being crowded out by long-term liabilities,” he said. “Most governments have taken steps to reform pensions and OPEBs, but I worry about some that may resort to gimmicks as a way to kick the can down the road.”
Virginia Finance Secretary Ric Brown described a credit review with Sugden as a professional “give and take” process with the state’s finance team that will be missed.
“When we met in any formal session to exchange information, he would kill me with questions and I would kill him with data,” Brown said. “Neither of us would walk away completely satisfied but we respected the fact that both of us had done our jobs. He is held in high regard by the Virginia financial team and we wish him only the best.”
While at S&P, Sugden covered various state and local credits from New York to Florida. He has also published reports on pensions, OPEBs, and debt and management practices. He was also a speaker at many public finance conferences.
The “world of munis” needs better disclosure practices, he said, particularly in the area of long-term liabilities and assumptions for pensions and OPEBs.
“More needs to be done to truly understand the differences between actual performance and funding policy assumptions,” Sugden said. “I'm particularly worried about the treatment of future revenues as current assets in pension systems, as some have proposed more recently.”
Some issuers need to develop discipline to achieve structural budget balance as they conservatively managing long term liabilities, in this sustained period of low revenue growth and growing fixed costs, he said.
Florida Division of Bond Finance Director Ben Watkins appreciated Sugden’s ability to “see the big picture.”
But it wasn’t always that way, at least not when Sugden first took over as S&P’s lead analyst working on the state’s credit as well as local governments.
“I was very apprehensive but he did a tremendous job,” Watkins said. “He was tough but fair.”
Insight helped Sugden develop “a very, very clear vision of the big picture,” Watkins said, adding, “We were the beneficiary of his clear headedness while he was lead analyst for the state. He has a deep understanding of the state and its finances.”
Watkins said Sugden understood Florida so well that he “stole my talent” when he lured Nora Wittstruck from Watkins’ office to S&P about a year and a half ago.
“I told John that he could rest assured there was going to be payback, and he left before I could deliver on it,” Watkins joked. “I’m going to get even with him some day, somehow.”
Born in San Juan, Puerto Rico, Sugden received a bachelor’s degree in psychology and government from Georgetown University, and a Master of Business Administration degree from New York University’s Stern School of Business.
He’s a member of the National Federation of Municipal Analysts and its local affiliate, the Municipal Analyst Group of New York.
Tina Morris, a managing director and head of U.S. Public Finance, said Sugden will be missed.
“We are grateful for his exceptional leadership and the analysts he has groomed during his time at S&P Global Ratings,” she said. “As the leader of our pension task force, he built out a strong capability for us in one of the most critical areas in municipal finance today.”
Robin Prunty, an S&P managing director and head of analytics, research and market education, said she worked closely with Sugden throughout his career.
“It was great to see him develop into such a strong analyst with a great passion for the industry,” Prunty said. “His intellect, as well as his caring, compassionate and friendly personality will be greatly missed.”