The burden of long-term pension costs and why the problem isn’t just pension reform

It’s no secret that one of the biggest financial challenges is and continues to be meeting long-term pension obligations, which according to a 2012 Moody’s, across the U.S. this tab adds up to the tune of around $2 trillion. That’s trillion with a “t.” According to a 2012 study on this very issue by Moody’s:

U.S. states and localities have run up more than $2 trillion of unfunded pension liabilities, Moody’s Investors Service said on Monday, citing data on plans offered by 8,500 local governments and over 14,000 individual entities.  Investors in the $3.7 trillion municipal bond market are focused on whether states, counties, cities and towns can afford the pension benefits granted public workers.

I bring this up because just a few days ago Moody’s issued a statement revising its outlook of City of Houston’s General Obligation Limited Tax Debt to negative. (The current rating of Aa2, however, was affirmed.) The reasons why are telling (emphasis added):

The outlook revision to negative reflects the challenges the city faces from growing pensions costs and liabilities, which are compounded by significantly limited revenue raising flexibility, and projected structural imbalance. In fiscal year 2014, fixed costs (pension, OPEB and debt) equaled about 30% of the budget. In the city’s three pensions systems, the total unfunded liability, as reported, equaled $3.2 billion, at fiscal year end 2014; nearly double the liability reported five years ago. Current forecasts indicate increased pension costs, which could further weaken the city’s financial position which include budget gaps in the five year projection. A sustainable plan to manage the costs, while balancing the budgets, and meeting full required contributions will be key credit considerations going forward.

Candidates running for the upcoming 2015 Houston mayoral race are already positioning themselves as the guy (I’m currently not aware of any women running as of yet) who will roll up their sleeves, address growing pension costs, and lead our great City to financial nirvana.  But Moody’s also notes another big (and unfortunately less politically acceptable) cause for this negative outlook is what it calls “limited revenue raising flexibility”. In other words, the City needs to bring in more $$.  As the campaign moves into the closing months, any candidate with the courage to address the revenue side of this problem won’t win very many votes but will probably be the best person to actually solve our City’s financial woes once and for all.

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