National Association of State Retirement Administrators

Credit Effects

The condition of public pensions is a key element in determining the creditworthiness of states and local governments, a factor that received considerable attention in the wake of the 2008-2009 recession and market decline, which negatively impacted government revenues and public pension investment portfolios, respectively. As shown via resources listed below, credit rating agencies specify the methodology they use to consider pension obligations when assessing state and local creditworthiness.

Rating Agency Methodologies

Other Reports

S&P Global

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 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. 

NASRA Resources

Other Resources