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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


Become A Member

Becoming a member of NASRA offers a unique opportunity to join a community committed to the sound, efficient, and innovative stewardship of public retirement systems. Membership connects you with a network of professionals and experts, providing valuable insights into managing public retirement systems with a focus on sustainability and risk-averse strategies.

By joining NASRA, you gain the tools and resources to enhance the management of public retirement systems, ensuring their long-term success and reliability for generations to come.

What's New at NASRA: Government Spending Issue Brief

NASRA’s March 2026 update on government spending makes a basic but important point: public pension benefits are not paid out of a government’s day-to-day operating budget. They are paid from trust funds that employees and employers contribute to during an employee’s working years. Those trusts distribute more than $400 billion each year to retirees and beneficiaries in communities across the country. On a national basis, employer contributions to pension trusts in FY 2023 equaled 5.16 percent of direct general spending by state and local governments, which shows that pension contributions remain a limited share of overall public spending even though the level varies from one state to another. 
The brief also shows that pension costs should be viewed in the context of the changes governments have made over the past 15 years to strengthen plan funding. Following the 2008–09 market decline, nearly every state and many local governments adjusted contributions, benefits, or both to improve pension sustainability. More recent data show that employer contributions increased from FY 2022 to FY 2023, but pension spending as a share of total government spending remained broadly stable. The updated brief provides FY 2023 figures and also projects the aggregate pension spending rate for FY 2024, offering a useful snapshot of both current costs and the longer funding trend.