Fitch Ratings has warned that a new method it uses to assess state and municipal obligations may prompt ratings downgrades because of governments' growing pension obligations. "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," a Fitch representative told the Financial Times.
Fitch seems principally worried about municipal pensions largely because employee costs are a greater percentage of budgets in cities and towns than in states. It noted that pension costs alone are consuming one quarter of Miami's budget. Fitch also said that it would value pension assets at an assumed rate of return of 7 percent. By contrast, states and municipalities have been using a rate equal to 8 percent or higher in some cases, which makes the plans seem better fund than in Fitch's model.
Fitch seems principally worried about municipal pensions largely because employee costs are a greater percentage of budgets in cities and towns than in states. It noted that pension costs alone are consuming one quarter of Miami's budget. Fitch also said that it would value pension assets at an assumed rate of return of 7 percent. By contrast, states and municipalities have been using a rate equal to 8 percent or higher in some cases, which makes the plans seem better fund than in Fitch's model.
Join the conversation