Posted on 02/17/2011 2:53:34 PM PST by FromLori
Cash-strapped US states and cities face the prospect of downgrades after Fitch Ratings changed the way it analyses their burgeoning pension bills.
In a report published on Thursday, Fitch warns the new approach could lead to “limited negative rating action”, particularly for local governments with big wage bills. The changes to the way it assesses pension liabilities come amid growing concern over the scale of municipal debt problems and the effect on state and city finances of generous, unfunded public sector pension schemes that will run for many years.
Sharp falls in equities and other risky assets during the financial crisis reduced the funding levels of nearly all these pension plans, increasing the pressure on states and local governments when they have even less cash because of dwindling tax revenues to make up the shortfall. Revenues have tumbled while spending has been rising.
“The key questions are whether states and local governments are funding their pensions, how much it is taking up of their general fund and concern about the crowding out of spending for other needs,” said Laura Porter at Fitch.
The rating agency, which used data from 2009, said there was cause for near-term concern about “a number of” pension plans and pointed to the “considerable pressure that these obligations will place on many government budgets”. The greatest risk would come at the local level since labor-related costs were a higher percentage of local government budgets, Fitch said.
(Excerpt) Read more at cnbc.com ...
“”Using the 7 percent rate does not shift any plans from being adequately funded, which Fitch considers to be assets equal to 70 percent of liabilities, to “weak”, or under 60 percent. However, plans in Montana, Hawaii, Vermont and New Jersey are among those whose funding ratios fall under 60 percent using Fitch’s assumptions.
The Illinois State Employees Retirement System is the weakest at 37 percent, compared with 44 percent using its reported 8.5 percent assumed rate of return.
A hypothetical 6 percent assumption, however, would drag plans in Nevada, Massachusetts and Minnesota from adequately funded to weak ratios.”””
Using a 6% discount rate only puts 9 states as weak funded.
Not too bad as 6% is pretty conservative.
Why would anyone believe or trust rating agencies that were handing out AAA Investment Grade ratings like penny candies a few short years ago?
True but those rating agencies can downgrade a state and then interest rates rise and with the teachers and other public employee’s rioting this becomes an important part of the picture.
Just as there was a financial benefit to Fitch, Moody’s etc. in those AAA ratings, there must be a financial benefit for them in this. I cannot believe otherwise.
As for the teachers and public employees rioting....BRING IT ON!!!
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