Fitch's new pension analysis on state, local governments could lead to negative rating actions

By E. Janene Geiss

Philadelphia, Feb. 17 - Fitch Ratings said on Thursday that local government credits are likely to experience negative rating actions due to a new, enhanced analysis of state and local governments defined benefit pension obligations.

The rating agency said it is implementing several additional steps that will enhance its pension analysis and improve comparability. The new system should facilitate an increased focus on pension obligations as part of the broader analysis of state and local government credits.

Due to changes in how it analyzes pensions, local government credits are more likely to experience negative actions than state credits due to labor-related costs, which are a larger part of local government budgets, Fitch said.

"While governments are facing substantial pressures from their pension obligations, we expect most state and local governments to withstand these pressures," said Laura Porter, Fitch's managing director, in a news release.

These governments are taking steps to adjust contributions and benefits to ensure adequate pension funding, Porter added.

Limited negative rating actions due to this enhanced analysis are expected, but will not be widespread, Fitch said. And local governments are more likely to see negative rating actions as a result, the agency said.

As part of this new analysis, the agency is creating standardized investment return and asset valuation scenarios.

Fitch said it will consider the funded ratio of a system with a 7% investment return assumption, which is considered a reasonable adjustment for comparison purposes, rather than the funded ratio as reported by the system.

The agency generally considers a funded ratio of 70% or above to be adequate and less than 60% to be weak, while noting that the funded ratio is one of many factors considered in its analysis of pension obligations.

There is cause for near-term concern about a number of public sector pension plans and the considerable strain these obligations will have on government budgets.

But Fitch said it believes the vast majority of governments will meet their obligations.

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