articles Ratings /ratings/en/research/articles/190513-credit-faq-quick-start-guide-to-s-p-global-ratings-approach-to-u-s-state-and-local-government-pensions-10981905 content
Log in to other products

Login to Market Intelligence Platform

 /


Looking for more?

Request a Demo

You're one step closer to unlocking our suite of comprehensive and robust tools.

Fill out the form so we can connect you to the right person.

If your company has a current subscription with S&P Global Market Intelligence, you can register as a new user for access to the platform(s) covered by your license at Market Intelligence platform or S&P Capital IQ.

  • First Name*
  • Last Name*
  • Business Email *
  • Phone *
  • Company Name *
  • City *
  • We generated a verification code for you

  • Enter verification Code here*

* Required

Thank you for your interest in S&P Global Market Intelligence! We noticed you've identified yourself as a student. Through existing partnerships with academic institutions around the globe, it's likely you already have access to our resources. Please contact your professors, library, or administrative staff to receive your student login.

At this time we are unable to offer free trials or product demonstrations directly to students. If you discover that our solutions are not available to you, we encourage you to advocate at your university for a best-in-class learning experience that will help you long after you've completed your degree. We apologize for any inconvenience this may cause.

In This List
COMMENTS

Credit FAQ: Quick Start Guide To S&P Global Ratings' Approach To U.S. State And Local Government Pensions

Beyond The Buzz: Climate Change Diplomacy With Christiana Figueres

COMMENTS

Charter School Brief: California

NEWS

Bulletin: Illinois’ Credit Faces Mounting Pressure As Stimulus Stalls

COMMENTS

Credit FAQ: S&P Global Ratings' Approach To U.S. State Credit Enhancement Programs


Credit FAQ: Quick Start Guide To S&P Global Ratings' Approach To U.S. State And Local Government Pensions

(Editor's Note: This commentary applies to state and local government pensions within U.S. public finance and is not intended to describe or represent S&P Global Ratings' methodology for analyzing pensions in other sectors.)

S&P Global Ratings' approach to pensions and other postemployment benefits (OPEBs) focuses on affordability--both current and on a cost trajectory. We analyze funding discipline through assumptions and contribution methods to determine if pension/OPEB costs will lead to budgetary stress. We consider pension/OPEB expenses fixed costs, akin to debt and tailor our analysis to the specific risk factors of individual credits, so our pension/OPEB analysis is holistic and not keyed to any one number or assumption. Ultimately, regardless of the plan type, we believe that state and local governments can take proactive measurements to address potential rising costs.

Frequently Asked Questions

What is S&P Global Ratings' approach to incorporating pensions/OPEBs into its ratings?

Our approach to U.S. public finance pension and OPEB analysis places a strong focus on affordability over both the near and long term. To that end, as a starting point, we incorporate into our analysis liabilities as currently reported, as well as contributions to pension/OPEB plans relative to the budget or tax base. We then take a closer look at underlying assumptions and contribution methods to inform our view of the future cost and liability trajectory. Our forward-looking approach extends beyond a snapshot of an obligor's liabilities and educates our view of management discipline and expected future financial performance.

image
How much weight do pensions/OPEBs receive in ratings?

S&P Global Ratings factors pension into its scoring of liabilities, budgetary performance, institutional framework, and management. While the specific weighting of these factors varies across criteria, the cumulative analysis of them can result in significant weight on our view of the overall rating. High pension or OPEB costs can also trigger rating caps or notch adjustments within our state and local government rating criteria. Frequently, pension and OPEB liabilities also play into our holistic analysis of the rating beyond the indicative score.

image
Does S&P Global Ratings provide rating uplift for well-funded pension systems?

S&P Global Ratings does not provide explicit "extra credit" for well-funded pension/OPEB plans because, in our view, well-funded pensions and prudent funding practices represent what we believe governments should be doing routinely rather than the exception. However, these governments will likely score better within our criteria on liabilities, budgetary performance, debt, and management metrics and therefore often carry higher ratings.

Does S&P Global Ratings adjust the discount rate or other assumptions?

We do not adjust liabilities because we think such adjustments fall short of accurately representing liabilities or establishing comparability, and in some cases, even obscure actual risks. We believe a focus on future costs and affordability, rather than adjusted liabilities metrics, is most relevant to credit risk. The discount rate is an important metric, but amortization methods, such as level dollar versus level percent or open versus closed, can have equal or more weight on the liabilities and cost trajectory. We take a qualitative approach to looking at key methods and assumptions to determine our view of the extent to which we believe costs could escalate and lead to budgetary stress.

How does S&P Global Ratings incorporate legal flexibility around benefits into its ratings?

Legal flexibility around adjustments to pension/OPEB benefits varies across states, although frequently, OPEB benefits are more flexible than pension benefits. However, we do not assume that simply because a state does not actively restrict benefit reductions that the state or local government will cut benefits. We have seen significant political resistance to reducing benefits, and such measures can run counter to other state policy objectives, such as retirement security. In addition, protracted legal challenges often follow legislative action or reforms. Therefore, we consider pension/OPEB liabilities as fixed costs until the plan demonstrates credible steps to actually reduce benefits.

Does S&P Global Ratings consider debt, pension, and OPEB liabilities as equivalent?

We consider debt, pension, and OPEB expenses to be fixed costs. Unless there is credible action to reduce pension or OPEB benefits, we treat the liabilities as hard debt that must be paid. Even if a government can legally reduce contributions to pension or OPEB plans in a given year, it is still responsible for funding benefits as they come due.

Does S&P Global Ratings approach single-employer, agent multiple-employer, and cost-sharing multiple-employer pension/OPEB plans differently?

Although multiple-employer plans may benefit from administrative cost savings, overall risk factors (namely, escalating costs that could lead to budgetary stress) are consistent across plans. To the extent that local governments participate in multiple-employer plans, we might additionally factor risks into our view of the institutional framework. In environments where unanticipated cost increases have occurred or have a strong potential to occur, and governments are unable to sufficiently plan for such increases, we would view this as a negative in terms of predictability. In addition, if a government participates in a substantially underfunded state-administered plan over which it has no control, we might consider this an unfunded expenditure mandate.

What does S&P Global Ratings consider to be a "credible plan" to address pension/OPEB liabilities?

Where possible, both adopting realistic assumptions to value liabilities and employing strong funding discipline lay the foundation for developing a credible plan. Without these first steps, alternative actions to account for and curb rising retirement costs will likely prove inefficient. Regardless of whether or not the government has the ability to make plan-level adjustments, it can proactively plan and prepare for increasing costs, such as developing a long-term financial plan and dedicating specific funding sources. Other examples of credible plans include enacting pension and OPEB reforms at the plan level, such as lowering benefits offered, salary measures, or cost-of-living adjustments; applying a service cap to benefit accrual; or increasing the retirement age.

What are characteristics of well-managed pension and OPEB plans?

In our view, plans that demonstrate strong funding discipline by targeting 100% funding on a prudent and consistent actuarial basis with conservative assumptions and methods are much more likely to manage pension and OPEB liabilities and related budgetary costs than plans that do not. These governments will use conservative discount rates and current mortality projections, while also adopting amortization schedules that effectively pay down unfunded liabilities and make progress toward full funding instead of deferring and compounding costs for the future.

How does S&P Global Ratings view pension or OPEB obligation bonds?

As with all credit factors, we will consider pension obligation bonds (POBs) and OPEB obligation bonds (OOBs) holistically within the overall risk factors. As with any added debt, we consider ability to pay, but also as with new debt, we might not always consider POB/OOB issuance to have negative credit implications. However, we will generally view it negatively when one or more of the following conditions exists:

  • The bonds are used as a mechanism for short-term budget relief or poor funding structure;
  • Issuance is not combined with plan-specific measures to address the long-term liability; or
  • The bonds substantially reduce a government's debt capacity.

Related Research

  • Local Government Pension And Other Postemployment Benefits Analysis: A Closer Look, Nov. 8, 2017
  • Looking Forward: The Application Of The Discount Rate In Funding U.S. Government Pensions, Sept. 13, 2018
  • For The Five Highest-Funded U.S. State Pension Plans, Being Proactive Keeps Liabilities Manageable, Oct. 24, 2017
  • Pension Obligation Bonds’ Credit Impact On U.S. State And Local Government Issuers, Dec. 6, 2017
  • Pension Brief: Are Asset Transfers A Gimmick Or Sound Fiscal Strategy?, Feb. 19, 2019

This report does not constitute a rating action.

Primary Credit Analyst:Carol H Spain, Chicago (1) 312-233-7095;
carol.spain@spglobal.com
Secondary Contacts:Geoffrey E Buswick, Boston (1) 617-530-8311;
geoffrey.buswick@spglobal.com
Todd N Tauzer, FSA, CERA, FCA, MAAA, San Francisco (1) 415-371-5033;
todd.tauzer@spglobal.com

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.

Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.


Register with S&P Global Ratings

Register now to access exclusive content, events, tools, and more.

Go Back