Market MovesMay 11, 2020

Pension Demands Put Local Governments in a Jam, Moody’s Says

With virus-driven costs mounting, cities’ and towns’ financial outlook shifts to negative from neutral, agency rules.

Reported by Larry Light

Moody’s is more downbeat than ever on local governments’ fiscal stability, which is weighed down by the pandemic, as pension demands and other fixed requirements expand while tax revenue shrinks.

So Moody’s Investors Service has changed its outlook for them this year to negative from stable. Cities and towns will see costs for debt and pension obligations gobbling up a larger share of their revenues, the ratings agency said in a report.

Added to that is a projected drop in sales and income taxes, as well as property level income if a series of home defaults appear. In light of surging unemployment, all those appear very likely, Moody’s indicated.

A move by Democrats in Congress to send federal aid to states and municipalities is mired in a fight over what the GOP says would be a “blue-state bailout.”

Meanwhile, localities are in an uneasy position, and not all of them are in Democratic states. In New Orleans, spending reductions of about a third might occur, and that would possibly include layoffs, service reductions, and library closings. Tourism, a backbone of the Big Easy’s economy, has dwindled to nothing.

In Houston, the fall in oil’s price, party due to a plunge in demand, threatens revenues. In upstate New York’s Chemung County (which handily supported Donald Trump in 2016), a need to replace an aging sewage system likely will be put on hold.

“The full impact on pension costs will not arrive for several years, but the economic fallout from the coronavirus is threatening local governments’ ability to afford higher pension liabilities,” Moody’s analyst Natalie Claes wrote. “Finally, state actions to balance their fiscal 2021 budgets on the back of local governments by reducing transfers will negatively affect the sector.”

Amid the revenue contraction, “fixed costs for debt and retirement obligations will consume a higher proportion of local government revenue over the 12 to 18 months, while recent pension fund investment losses stand to severely compound the pension liability challenges already facing many local governments,” the agency said.

Further, it warned that the “losses will require many local governments to increase pension contributions in order to maintain funding ratios for defined benefit plans.” The requirement for greater contributions to the plans won’t kick in all at once, it added.