National Association of State Retirement Administrators


Credit Effects

The effect of pensions on the creditworthiness of the states and local governments that sponsor them gained considerable attention in recent years, particularly in the wake of the Great Recession and market decline, which negatively impacted government revenues and investment portfolios, respectively. Some credit ratings agencies are now modifying pension data using their own methodologies to standardize results and they are publishing this adjusted data, but these adjustments do not change a government's underliying pension liabilities. Credit ratings agencies have long been factoring pension liabilities into their credit ratings and bond ratings for only a small number of governments are expected to change due to pension obligations. 

Rating Agency Methodologies

Other Reports by Rating Agencies

Fitch Ratings
Standard & Poor's

Pension Obligation Bonds

According to Gabriel, Roeder, Smith & Co., pension obligation bonds:

Are financing instruments intended to relieve the issuer of some of the annual pension contribution. POB proceeds are typically used to pay some or all of the pension plan’s unfunded accrued liability (UAL) and may also include funds to pay the plan’s normal costs for two or three years into the future. In order to achieve the expected budgetary relief, the issuer hopes to invest the bond proceeds at a rate higher than the total cost of borrowing. The desired result is that the transaction reduces the annual pension contribution required to fund the plan by more than the total cost of borrowing.

A  2014 issue brief produced by the Center for State & Local Government Excellence and the Center for Retirement Research at Boston College finds that certain factors play a role the likelihood of a city or state issuing pension obligation bonds. These factors include financial pressures, high unemployment, low interest rates, and a large interest rate spread. In addition, a government is more likely to issue POBs if it sponsors its own pension plan, rather than if it participates in a plan with other employers. in whether or not an entity is states that, from 1986 through 2009, states and local governments issued approximately $53 billion in pension obligation bonds. 
 

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