Moody’s Warns of Lower State Pension Investment Expectations

CalPERS (Reuters / Max Whittaker)
Reuters / Max Whittaker

Moody’s Credit Rating Service warned last week that budgetary pressure on state and local governments is accelerating as public employee pension systems are forced to follow moves by CalPERS and CalSTRS to lower investment return expectations to 7 percent.

Moody’s on February 17 published: “State and Local Government — US: Softening Investment Expectations Signal Accelerating Budget Pressure from Pensions.”

Moody’s Senior Analyst Thomas Aaron commented that with both the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) moving to cut investment return assumptions to 7 percent by 2018, large United States public pension systems will be pressured to also drop their return assumptions in response to lower investment outlooks.

Aaron highlighted, “In a market context, these discount rate declines by public pension funds are well overdue.” Such a comment from Moody’s, as the premier credit rating agency, serves as a warning to state and local governments that they must substantially increase public employee pension cash contributions or face suffer credit rating downgrades that will push borrowing costs up dramatically.

With a national average annual investment return expectation of 7.62 percent, public employee pensions have been claiming that they are, on average, 73.7 percent funded, according to the National Association of State Retirement Administrators.

But even with inflated earnings expectations, the average funding plunged from 100.8 in 2001, primarily due to public employee retirement systems granting spectacularly higher public employee pension benefits, while minimizing annual pension contributions.

This explains why the number of retirees collecting more than $100,000 a year in pension checks from (CalPERS) jumped from 1,841 in 2005 to 21,625 in 2015, according to the latest data compiled by Transparent California.

The latest Stanford University “U.S. Pension Tracker” market basis estimate for the total U.S. public pension debt, if pension funds were invested in risk-free 20-year maturity Treasury Bonds yielding a fixed yield of 2.75 percent, equaled $5.599 trillion. That amounts to $47,388 per U.S. household and $17,288 for every man, woman and child in America.

Breitbart News reported last March that prior to the recent CalPERS and CalSTRS cuts in pension earnings estimates, Santa Barbara County, Kern County, Fresno County, San Mateo County and Ventura County were already spending about 10 percent or more of their total revenues on pension contributions, according to a study by the California Policy Center.

The reports’ author, Marc Joffe warned that despite public employee union leaders denying for years that the public employee pension burden was even close to 10 percent of state budgets, “This study shows the burden is now approaching 15 percent of revenues.”

Earlier this year, Governor Jerry Brown announced that California faces its first budget deficit since 2012, as the Golden State faces $1 billion in higher pension contribution costs, thanks to CalPERS and CalSTRS reducing their future investment earnings estimate to 7 percent.


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