Municipal analysts should scrutinize local pension plans because they are subject to more event risk, according to a report by Loop Capital Markets.
"For the states, the risks are right out there. Unique local situations are the local market drivers," Loop managing director Chris Mier said during a Wednesday afternoon conference call
Of particular concern, said Mier, are state and local entities that face a combination of low funded levels and above-average budget pressure from pension contributions.
"Balancing bonded debt with pension debt will be a challenge at a time of limited resources," said Mier. "Pension debt may crowd out bonded debt and affect infrastructure projects."
Loop vice president Rachel Barkley said local plans continue to have lower funded ratios than state plans. The aggregate funded ratio for local plans in Loop's database fell fractionally from the previous year, to 65.3% from 65.6%. This falls "notably" from the respective 73.1% and 73.5% state funding levels for those periods.
States on average contribute a moderate 4% of their budgets to pension spending, according to the study, while for local units face more budget pressure from pension contributions, accounting for 12% of general-fund spending, on average.
"States have a lot of additional financial flexibility in resources that [localities] don't have," said Barkley.
Chicago-based Loop expects to release its full report Thursday or Friday.
Pension funding is under increased scrutiny in public finance. Richard Ravitch, who advised New York City and state officials as the city emerged from its fiscal emergency in the 1970s, said bond rating agencies are much more vigilant today.
"Moody's came up with a thoughtful way to assess the public pension funds. Standard & Poor's hasn't followed suit yet, but they're very concerned," Ravitch, a former New York lieutenant governor and now a partner in management consulting firm Ravitch Rice & Co. LLC, said in a talk Monday at Evercore Wealth Management in Manhattan.
"Education and infrastructure are being crowded out by pension obligations," Ravitch said.
Mier called individual state performance "sticky," with four of the top and bottom five remaining in those groups. South Dakota and Wisconsin are fully funded, said the report, followed by North Carolina and Washington, with 95%, and Tennessee with 92%.
Pension battleground state Illinois has only a 39% funded level, according to Loop's data. Also in the bottom five are Kentucky (48%), Connecticut (49%), New Jersey (54%) and Alaska (55%).
"We are still relatively comfortable with 80%" as an acceptable threshold, said Mier, who acknowledged some dissent within the actuarial industry. The American Academy of Actuaries, the nation's largest actuarial trade association, has called 80% an "arbitrary myth," adding that no single funding level should serve as a defining line between healthy and unhealthy.
According to Loop, aggregate funded ratios for 19 states improved in fiscal 2013, up from five and 14 the previous two years. Oregon and Montana, both of which implemented pension overhauls, both raised their funding levels by 9%, to 91% and 73%, respectively.
While states with the largest increases - which include South Dakota, Ohio, Indiana, New Mexico, Utah and Arkansas -- have what Loop called "unique attributes," they also have common themes: most appear somewhat fiscally conservative and were already above the 80% threshold. "If you're in good shape to begin with, it's easier to adhere to the straight and narrow," said Mier.
Except for Ohio, these states also tend to have smaller populations and are either right-to-work states or have lower union concentration.
Aggregate funded ratios for 26 states declined, according to the data. New Jersey dropped from 61% to 54%, while Massachusetts, New York and Virginia dropped five percentage points each. Except for New York (93% to 88%), states that declined were "very weak" pension performing states to begin with.
Public pension funding remains a huge variable in policy decisions, and politics.
Daniel DiSalvo, assistant professor at City University of New York and a senior fellow at the Manhattan Institute for Policy Research, said making public employee unions more transparent and democratic might generate a different set of talking points when unions negotiate public pension packages.
"One of the first things you'd see is more participation by workers in the early to middle parts of their careers," DiSalvo said in a Wednesday speech at the Harvard Club of New York. "You might see more cooperative politics in the pension world."
He added: "This has an impact on the rest of us. Even an issue as quotidian as a basic agreement over pay has political implications, because it involves the allocation of limited tax dollars."
