The effect of pensions on the creditworthiness of the states and local governments that sponsor pension plans has gained considerable attention in recent years, particularly in the wake of the 2008-2009 recession and market decline, which negatively impacted government revenues and public pension investment portfolios, respectively. Some credit rating agencies are now modifying pension data using their methodologies to standardize results and they are publishing this adjusted data, but these adjustments do not change a government's underlying 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.
US States Rating Methodology, Moody's (April 2013)
Tax-Supported Rating Criteria, Fitch (August 2012)
Revised Pension Risk Measurements, Fitch (June 2017)
US State Rating Methodology, S&P Global (October 2016)
Local Government Pension And Other Postemployment Benefits Analysis: A Closer Look, S&P Global (November 2017)
US Local Governments General Obligation Ratings: Methodology And Assumptions, S&P Global (September 2013)
Local Government Pension Analysis (April 2013)
Five U.S. State and Local Government Pension and OPEB Trends to Watch in 2020 and Beyond, S&P Global, January 2020
U.S. State Pension Reforms Partly Mitigate the Effects of the Next Recession, S&P Global, September 2019
Assessment of Pension and OPEB Condition of the Nation's Fifteen Largest Cities, S&P Global, September 2019
Retiree Medical Benefits Generate Unique Cost Drivers And Risks For U.S. States, S&P Global, September 2019
Pension Obligation Bonds' Credit Impact on U.S. Local Government Issuers, S&P Global, December 2017
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 in 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. Also, a government is more likely to issue POBs if it sponsors its pension plan, rather than if it participates in a plan with other employers. Regardless of what entity issues, from 1986 through 2009, states and local governments issued approximately $53 billion in pension obligation bonds.
Books, Budgets and Bonds: What Do All Those Pension Numbers Mean?, Keith Brainard, Government Finance Review (April 2013)
Go Figure! New guidelines are changing how public pension accounting affects the books, budget and bond ratings , Keith Brainard, State Legislatures Magazine (July/August 2013)
OPEB Brief: Risks Weigh On Credit Even Where There Is Legal Flexibility, S&P Global, May 22, 2019
History of State Ratings, S&P Global, March 2019
Government Bond Ratings, S&P Global, June 2018
Governmental Plan Pension Obligation Bonds, Buck Consultants, July 22, 2015
State and Local Pensions 101, Morningstar, Inc. (November 2012)