Credit Effects

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. 

Rating Agency Methodologies

• US States Rating Methodology, Moody's (April 2018)

• US Public Finance Tax-Supported Rating Criteria, Fitch (May 2021)

• Revised Pension Risk Measurements, Fitch (June 2017)

• US State Rating Methodology, S&P Global (October 2016) 

• Assessing U.S. Public Finance Pension And Other Postemployment Obligations For GO Debt, Local Government GO Ratings, And State Ratings, S&P Global, (October 2019) 

• How S&P Global Ratings Will Implement Pension and OPEB Guidance In U.S. Public Finance State and Local Government Credit Analysis (October 2019) 

• Quick Start Guide to S&P Global Ratings' Approach to US State and Local Government Pensions (May 2019)  

Other Reports by Rating Agencies

Fitch Ratings

• U.S. State and Local Pension Investments; Concerns Grow with Riskier Allocations, Lower Returns, (May 2019)

• 2018 State Pension Update: Rising Accrued Benefits and Flat Assets Push Pensions Higher, (November 2018)

• Path to Impactful U.S. Public Pension Reforms Paved by Court Decisions, (June 2018)

• Slower Growth in Pension Contributions: Contribution Practices Improve But Remain Inadequate (May 2018)

S&P Global

• Looking Forward: The Application of the Discount Rate in Funding US Government Pensions, September 2018

• Recent Pension Funding Gains For Largest U.S. Cities Expected To Be Short-Lived, September 2022

• The Future of US Public Pension Plans After the Sudden-Stop Recession, May 2020

• Five U.S. State and Local Government Pension and OPEB Trends to Watch in 2020 and Beyond, January 2020

• U.S. State Pension Reforms Partly Mitigate the Effects of the Next Recession, September 2019

• Assessment of Pension and OPEB Condition of the Nation's Fifteen Largest Cities, September 2019

• Retiree Medical Benefits Generate Unique Cost Drivers And Risks For U.S. States, September 2019

• Credit Effects Of Municipal Pension Plans Approaching Asset Depletion September 2019

• U.S. State Pensions Struggle For Gains Amid Market Shifts And Demographic Headwinds October 2018

• Recent U.S. State Pension Reform: Balancing Long-Term Strategy And Budget Reality February 2018

• For The Five Highest-Funded U.S. State Pension Plans, Being Proactive Keeps Liabilities Manageable October 2017

Pension Obligation Bonds

• GFOA Advisory: Pension Obligation Bonds

• Pension Obligation Bonds' Credit Impact on Local Government Credit Issuers December 2017
• Pension Obligation Bonds: Know Their Appeals and Pitfalls, Segal, March 2021

• Governmental Plan Pension Obligation Bonds, Buck Consultants, July 2015

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.