Fitch Ratings | Pension360

Fitch: Pension Fund “Depletion Dates” Raise Red Flags

Under new GASB accounting standards, public pension funds are required to calculate their “depletion date” – or, the date where benefit payouts become larger than assets.

The dates help give context to the funding situations at the pension funds, says Fitch Ratings. For some of the country’s most underfunded plans, the depletion dates are startlingly close.

From Reuters:

New accounting rules for public pensions are exposing the damage done by U.S. states, including New Jersey, that have failed to adequately fund their retirement systems, according to a report to be released by Fitch Ratings on Friday.

With the first wave of pensions beginning to issue financial statements under the new rules, the impact of underfunding becomes clearer, the Fitch report shows.

[…]

Some retirement systems already known for their fiscal struggles reported depletion dates.

Six of New Jersey’s seven funds, for example, disclosed depletion dates as of their June 30, 2014 valuations. The two largest – covering retired state employees and teachers – said their tipping points would come in 2024 and 2027, respectively.

Under the previous actuarial methods, those plans were funded at 49.1 percent and 51.5 percent, a distressed level far off the minimum 80 percent generally considered healthy. Under the new calculations, which included a lower blended rate of return, those levels look even worse, at 27.9 percent and 28.5 percent.

Even Illinois, with among the worst-funded state retirement systems in the U.S., doesn’t have depletion dates until 2065 for two of its three biggest funds and is able to use higher blended rates. It has no depletion date for the third fund, Fitch Senior Director Douglas Offerman told Reuters in an email.

The nation’s most underfunded plan –the Kentucky Employee Retirement System – did not report a depletion date because recent reforms complicated the calculation.

Photo by Paul Becker via Flickr CC License

Fitch: Hedge Funds Will Continue “Winning and Keeping” Public Pensions Assets

Fitch Ratings predicts that, despite several high-profile exits by pension funds this year, hedge funds will continue to count public pension funds as major investors.

The ratings agency says exits by funds like CalPERS are “not representative of broader sector trends” and says it believes hedge funds still “deliver competitive returns net of fees, while providing a degree of downside protection and uncorrelated return during periods of stress”.

From Fitch:

Recent decisions by two large US public pension plans to pull back from hedge fund investments, and the likelihood of a sixth consecutive calendar year of return averages underperforming broad equity market returns, are not expected to curb investors’ overall allocations to hedge funds, according to Fitch Ratings.

Barring an unforeseen major market decline, hedge fund assets under management (AUM) should continue on a path toward $3.0 trillion, good growth relative to 2013’s year-end level of $2.6 trillion. The rise is attributable to market appreciation and inflows outpacing redemptions. The AUM flows show significant variation by strategy, with equity-oriented funds attracting more capital in recent periods, but global macro funds falling from favor.

While hedge fund growth has certainly slowed over the past several years, the high-profile pension plan withdrawals seen over the past six weeks are not representative of broader sector trends, in our view.

The Fitch report backs its conclusions with data from several studies conducted this year:

Fitch points to analysis recently compiled by Preqin as an indicator of the progress that hedge funds have made in winning and keeping US public pension assets more broadly. The data generally shows improvements in hedge fund investment allocations by public pensions since 2010. As of June 2014, 269 public pensions in the US made allocations to hedge funds, with an average of about 8.6% of their total AUM allocated to hedge funds.

[…]

Over the past decade and a half, hedge funds have delivered steadier performance relative to the overall market during bear markets, as was seen in 2000 to 2002 and in 2008. This downside protection, however, comes at the expense of limited upside during bull markets, a trend seen in 2003, 2009 and especially 2013.

According to Hedge Fund Research, hedge fund performance averages are set to be nearer to the broad equity market measures in 2014. However, trailing 36- and 48-month annual return levels generally range around low single-digit percentages, which paint the entire sector as under delivering relative to broader equity index benchmarks.

Read the full Fitch release here.

Fitch Slaps Jacksonville With Credit Downgrade Over Pension Obligations

Fitch warned Jacksonville earlier this year that a credit downgrade was waiting in the wings if the city didn’t move to control its rising pension costs.

Fitch has now followed through on the threat, downgrading several city bonds from AA+ to AA, and others from AA to AA-.

In doing so, Fitch becomes the second agency to downgrade Jacksonville’s credit in the last four months. Moody’s did so in June.

From the Jacksonville Daily Record:

Fitch Ratings has downgraded several of Jacksonville’s bonds, citing pension risk and lack of reform as key drivers to its negative changes.

In all, about $1 billion in bonds and commercial paper notes were downgraded. Three bonds went from AA+ to AA, while one bond and the city’s commercial paper went from AA to AA-.

Regarding the city’s unlimited tax general obligation, its pension and liability profile is more consistent with an AA rating as opposed to an AA+ rating, the agency explains in its notes. Ratings affect the city’s interest rates on borrowing.

“The rating action focuses on credit risk associated with the city’s pension plans, which have a large collective unfunded actuarial accrued liability and rapidly escalating funding costs,” it states.

The city’s police and fire pension plan’s unfunded liability is more than $1.6 billion. The annual cost of paying into the plan is a projected $154 million for fiscal year 2014-15, up $6 million from the year before.

Chief among Fitch’s concerns is the city’s stalled pension reform efforts. One Fitch analyst said reform has been “very slow to evolve”. From the Florida Times-Union:

Fitch Ratings voiced concerns Monday about whether Jacksonville can actually achieve pension reform that will strengthen the city’s financial outlook.

[…]

After noting that some City Council members have filed amendments seeking to change a pension bill introduced by Mayor Alvin Brown, Fitch’s report questions “when or if” the City Council will vote on that bill.

Fitch also points out that Brown’s bill doesn’t identify a “definitive long-term funding source” to pay for a $400 million piece of Brown’s proposal — a criticism also lodged by several City Council members and the Jacksonville Civic Council, a high-profile business group.

[…]

Fitch put Jacksonville on notice earlier this year it would downgrade the city’s ratings if pension reform isn’t achieved. Brown filed his pension bill in June but it went on the back-burner during the summer budget hearings. The City Council conducted its first session last Wednesday to discuss the bill.

The Mayor’s Office has said the question-filled meeting was productive. But Fitch’s analysts were “concerned that it was not the progress they were after,” said city Chief Financial Officer Ronnie Belton, who talked to the analysts last week.

“I think the message from them is, ‘We’re looking for you to deal with the No. 1 issue you’ve got,’ ” Belton said.

Read the Fitch report here.

Fitch Downgrades New Jersey Credit Rating For Second Time in Five Months

On Friday, New Jersey was dealt another fiscal blow when rating agency Fitch downgraded New Jersey’s credit rating. The agency said New Jersey exacerbated “a key credit weakness” when it decreased its payments to the state pension system. From the Star-Ledger:

Wall Street analysts at Fitch Ratings today downgraded New Jersey’s bond rating for the second time this year, citing the state’s poor economic performance, Gov. Chris Christie’s rosy revenue forecasts — which failed to materialize — and his decision to plug the resulting budget gap by cutting $2.4 billion in funding for the state’s strained pension system.

Fitch said Christie’s decision to cut the pension payments this year marked a “repudiation” of a bipartisan plan he signed to fix the beleaguered retirement system for public workers, which is underfunded by nearly $40 billion, according to state estimates.

Instead of pumping bigger cash infusions every year into workers’ retirement accounts to save them from collapse — as Christie and lawmakers agreed to do in his first term — New Jersey is now stepping away from its plan, Fitch said.

“Following significant revenue underperformance, the state relied upon the repudiation of its statutory contribution requirements to the pension systems to return to budgetary balance, exacerbating a key credit weakness,” the Fitch analysts wrote in a note to investors, lowering their rating on the state’s debt from A+ to A.

New Jersey’s Treasury department responded to the downgrade by defending Christie’s decision to divert much of the state’s pension payment into the general budget. From The Star-Ledger:

A spokesman for the state Treasury Department said Christie “acted responsibly” by shrinking two pension payments that had been scheduled for the current and previous fiscal years.

“Without raising taxes on an already overburdened populace, Governor Christie has already contributed more to the pension system than any previous governor,” said the Treasury spokesman, Chris Santarelli, in an emailed statement.

“As rating agencies and ratings expectations have been recalibrated following the financial crisis of the late 2000s, the state Treasury and Office of Public Finance have worked tirelessly to ensure that New Jersey is rated fairly and equally by the Wall Street rating agencies; and will continue to do so.”

This is the second time in five months Fitch has downgraded New Jersey’s credit rating.

Photo by Walter Burns via Wikimedia Commons