State and local government pension plans' adjusted net liabilities increased about 25% in fiscal year 2020 due to interest rate declines, according to a new report Tuesday from Moody's Investors Service.
Because of the market rebound in the second quarter, however, plans should avoid any real increase in costs or a material worsening in cash flow, according to Moody's "Sector In-Depth" report.
According to Moody's estimates, adjusted net pension liabilities for U.S. state and local government pension plans now exceed $5 trillion in aggregate.
That increase was "largely driven by an 80-basis-point decline in the market-based discount rate Moody's applies to value pension liabilities," said Thomas Aaron, vice president and senior credit officer at Moody's and co-author of the report, in a news release. "While less detrimental to governments' credit quality than a scenario involving substantial investment losses, the rise in long-term liabilities nonetheless signals that state and local governments' pension risks are higher than ever."
The range of reported returns for the fiscal year ended June 30 varied widely but generally ranged from 1% to 4%.
"Governments' annual pension costs will rise, but to a far lesser extent than if investment markets hadn't rebounded," Mr. Aaron said. "Overall, pension system non-investment cash flow and asset/benefit coverage will remain relatively stable following fiscal 2020 investment performance."