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S&P: BENEFIT LIABILITIES WEIGH ON STRENGTHENING MASS. MUNICIPALITIES .: The State House News Service

S&P: BENEFIT LIABILITIES WEIGH ON STRENGTHENING MASS. MUNICIPALITIES

By Colin A. Young
STATE HOUSE NEWS SERVICE

STATE HOUSE, BOSTON, SEPT. 14, 2017...Local governments in Massachusetts have bolstered their budgetary reserves amid a growing economy and while local credit ratings are expected to remain stable for three to five years, rising pension and post-employment benefit costs threaten to change that, a major credit rating agency reported Wednesday.

Massachusetts has some of the highest local government credit ratings in the country, S&P Global Ratings said in a report, due to the state's high wealth and incomes, and access to robust employment centers. But it is also among the weakest states in terms of pension-funded ratios, a threat that could push some municipal budgets out of balance.

Current-dollar state GDP increased to $507.9 billion from $360.6 billion since 2006, the report said. And since 2011, local government budget reserves have risen 34 percent and 7 percent in the last year alone, growth S&P attributed to strong motor vehicle excise tax collections and a surge in building permits.

"Because of stronger reserves and economic conditions, we've seen general credit improvement in the past year, with eight upgrades and only one downgrade," S&P Global Ratings wrote in its report. "We expect this improvement to continue for the next few years because there is no immediate indication of an economic slowdown. Nevertheless, we view retirement liabilities as a long-term credit concern."

The average annual cost to local governments of pension and other postemployment benefit (OPEB) liabilities stands now at 5.5 percent of general fund expenditures but S&P warned those costs could grow at a rate of 8 percent a year over the next 15 years, eventually consuming as much as 20 percent of some municipal budgets.

Compounding the problem is that Massachusetts pension systems, on average, are 62.5 percent funded, below the national average of 78 percent and well below the requirement to be fully funded by 2040. Three of the least funded pension systems in America are in Massachusetts: Springfield (26 percent funded), Fall River (41 percent) and Worcester (43 percent), according to S&P.

For some municipalities, especially ones where the unfunded OPEB liability is greater than the net pension liability, the approaching wave of retirements could be a greater threat to their credit ratings.

More people will enter retirement age (65 or older) in Massachusetts between 2017 and 2022 than any other time in state history, S&P reported, citing state census reports. That phenomenon, sometimes referred to as the silver tsunami, is expected to drive up OPEB costs.

Proposition 2 1/2, which caps property tax increases at 2.5 percent annually, limits municipal managers' ability to raise the revenue necessary to fund pension and OPEB costs. "Without revenue-raising flexibility, rising retirement costs could push some cities and towns into budgetary imbalance, particularly if local management has failed to plan for these costs," S&P said. "And, as a result, we could see credit deterioration for some issuers."

-END-
09/14/2017

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