Local governments’ unfunded pension liabilities that declined in 2013 thanks to strong investment returns and higher interest rates will carry into the new year, according to a Moody’s Investors Service.
Rates increased 68 basis points in 2013, causing net pension liabilities to decrease an estimated 15%. Moody’s noted that the five largest public pension plans exceeded their assumed rates of return in 2013.
However, pension costs will continue to rise in 2014 as unfunded liabilities remain, Moody’s analysts said, particularly if governments fail to make their full contributions.
Several legal issues in 2014 will also affect how local governments can address their pension liabilities, including trimming benefits for current employees, changing cost-of-living adjustments, and whether pensions are protected in bankruptcy proceedings.
Some of the key examples will be found in Atlanta, Chicago, Cincinnati, Jacksonville and Kansas City, Moody’s said.
Some pension experts caution about using Moody’s analyses to compare public systems year to year. Moody’s calculates pension liabilities differently than the systems in question, “which makes it difficult to understand what’s going on,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. “We think it’s better to look at the real factors,” which include investment returns, the percentage of required contributions made each year, an amortization schedule for paying off unfunded liability and reforms, said Ms. Munnell.