Unfunded pension plans remain the biggest long-term liability for most of the largest local governments, according to a report from Moody's Investors Service.
The report, issued Thursday, showed that adjusted net pension liabilities — Moody's method of calculating the unfunded pension liabilities of a municipal issuer — amounted to $450 billion for the 50 largest local governments in aggregate. Individually, unfunded liabilities accounted for the largest long-term liability for 29 of the 50 surveyed governments in 2018.
Moody's predicted that for many local governments, falling interest rates will increase pension liabilities in 2020 after a series of consecutive declines. For many governments with pension measurements that lag their own financial reporting, 2020 adjust pension liabilities will rise significantly because of 2019's steep decline in the FTSE Pension Liability index.
Five of the 50 largest local governments have adjusted net other post-employment benefits liabilities that exceed 100% of revenues, the report shows. Most governments don't have enough assets to prefund future OPEB benefits, although some, such as Honolulu, are incurring higher near-term costs to more rapidly build OPEB assets.
Among the 50 largest local governments, in 2018, contributions relative to revenues ranged from 1% to 17%. Despite 7% or higher discount rate assumptions by most, 34 had what Moody's describes as "tread-water gaps" in 2018.
"Governments at higher risk of material new unfunded liabilities have pension assets that are large relative to their own budgets, with return targets that require heavy allocations to volatile investment classes," the report said. Those with severely underfunded pension plans lacking strong non-investment cash flow don't have much flexibility to reduce their annual contributions without running the risk of severely deteriorating its pension assets.