Unfunded public pension liabilities are not severe enough to result in defaults by municipal bond issuers, a report by Herbert J. Sims & Co. analyst Richard Larkin said.
State and city retirement funds aren’t insolvent and forecasts of widespread defaults and municipal bankruptcies are overblown, Mr. Sims said in the report. A historic review of pension history shows that underfunding hasn’t led to “budgetary insolvency and default,” the report said.
Separately, Standard & Poor’s said in its own report that the funding ratio for state plans fell to 80% in 2008 from 83% in 2007 and 100% in 2000.
“There have been a lot of observers who are predicting a meltdown of the municipal bond market, citing unfunded pension liabilities as the leading reason,” Mr. Larkin wrote in an e-mail. “An unfunded pension liability will not by itself lead to immediate financial crisis or insolvency.”
The Herbert J. Sims report said “uninformed observers” have been citing unfunded obligations as a “bubble” that will lead to the next bond market crisis. The only situation in which a city or state might be in financial crisis would be when a municipality failed to save any money toward its future retiree costs, Mr. Larkin said in the e-mail.
The report acknowledges that liabilities need to be addressed to avoid passing on rapidly rising costs to future generations. Such shortfalls have occurred in the past and will again in the future, the report said.
Meanwhile, S&P said the decline in public pension assets that began in fiscal 2008 is “contributing to significant budget challenges for U.S. states.”
States face having to increase funding for pensions even though federal stimulus payments to states are ending and “before meaningful revenue recovery has taken hold,” the S&P report said, according to a news release.
“This shortfall in assets is causing many states to rethink core services, programs and benefit levels, including pensions,” said S&P managing director Robin Prunty in the release.