Business

Moody’s – Pension Liabilities Surge In 2017

A recent report from Moody’s Investor Service presages troubling times for pensions belonging to the 50 largest local governments- US. According to the report, Adjusted Net Pension Liabilities (ANPLs) rose in the 2016 fiscal year for 42 of the 50 largest local governments. The ranking is comprised of the total debt outstanding held by these local governments.

Get The Full Warren Buffett Series in PDF

Get the entire 10-part series on Warren Buffett in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Projections indicate that there will be spikes to the ANPL for 2017, and despite the expectation for moderate declines in fiscal 2018, pension pressures will remain considerable. Most of the governments highlighted in the report are contributing inadequate amounts to their pension funds to stem the growth in net liabilities while others may face severe investment losses in the event of a market downturn. Furthermore, new accounting rules that may require a reduction in discount rates will likely effect retiree healthcare and other post-employment benefits (OPEB) debt burdens.

Pension liabilities have become the most significant driver for balance sheet leverage for the 50 largest local governments says the report. The aggregate ANLPs have reached $456 billion in 2016, an increase from the last year’s $390 billion. This growth has resulted in cumulative liabilities that double the size of the debt and reported OPEB liabilities combined for these local governments.

During 2017, ANLPs for most governments outlined in the report are expected to rise by 33%, and then fall to 8%-10% in fiscal 2018. The analysis has cited that many of these governments report their pensions in arrears which have contributed to a lagging of recognition of 2016’s weak investment returns as well as declining market discount rates.

The report goes on to indicate that most of the governments listed are not contributing enough to their pensions funds to avoid the growth of liabilities. Out of the 50 largest local governments in the report, only 16 have made contributions that were sufficient to cover the cost of their debt for the fiscal year; this includes covering service cost and the cost of implied interest on their reported net pension liabilities.

Additionally, seven of the 50 largest had a “budget shock” indicator greater than 10%. This is an indicator that warns of impending losses of 25% or more due to market conditions.  Lastly, five of the 50 largest reported unfunded OPEB liabilities those were greater than 100% of their operating revenues.