Municipal Pensions: A Big Problem?

Underfunded pension systems pose significant challenges to many state and local governments. For a few, it’s an immediate problem. But as my colleague Joe Rosenblum explains, for most municipalities, pension troubles aren’t really the proverbial last straw.

However, while the problem is longer term, state and local governments with the greatest shortfalls need to address their pension funding shortfalls soon. Rules recently adopted by the Government Accounting Standards Board (GASB) require state and local governments to disclose a “truer” level of their pension funding.  As a result, the magnitude of reported unfunded pension liabilities will jump for many states and localities.

Unfortunately, GASB does not have the power to force state and local governments to fully fund their pensions. While GASB’s new rules will put political pressure on certain states and localities to increase their annual pension contributions, we don’t believe they will increase municipal bankruptcies. Instead, we believe the new GASB rules will push states and localities to take a tough stance in ongoing collective bargaining negotiations.

Most state constitutions prohibit promised pension benefits from being taken away, but the same guarantees do not apply to many other benefits won during far better economic times in collective bargaining agreements.

These benefits—as well as the threat of layoffs—will be used as leverage to require employees to increase their pension contributions, extend their retirement age, eliminate cost-of-living increases in pension benefits and make other changes that will significantly reduce unfunded pension liabilities going forward.

Indeed, just the threat of using bankruptcy to completely restructure pension and other benefits should bring municipal employee unions to the bargaining table in hopes that a less radical approach can be found.

The questions we’re asking regarding all municipal issuers that are underfunded are: how big is the shortfall, and how will the shortfall be remedied? We’ll delve into how states are taking corrective actions around these issues in our second post on this topic next week. Stay tuned.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Douglas J. Peebles

Chief Investment Officer—AB Fixed Income
Douglas J. Peebles is the Chief Investment Officer of AB Fixed Income and a Partner of the firm, focusing on fixed-income investment processes, strategy and performance across portfolios globally. As CIO, he is also Co-Chairman of the Interest Rates and Currencies Research Review team, which is responsible for setting interest-rate and currency policy for all fixed-income portfolios. In addition, Peebles serves as Lead Portfolio Manager for AB’s Unconstrained Bond Strategy, and focuses on managing the firm’s strategic client relationships. In 1997, he pioneered AB’s highly successful and innovative approach to global multi-sector high-income investing, which is now being adopted by other firms. Since joining AB in 1987, Peebles has held several leadership positions, including director of Global Fixed Income (1997–2004), co-head of AB Fixed Income (2004–2008) and Head of Fixed Income (2008–2016). He holds a BA from Muhlenberg College and an MBA from Rutgers University. Location: New York

Joseph Rosenblum

Director—Municipal Credit Research
Joseph Rosenblum is the Director of Municipal Credit Research and a member of the Tax-Exempt Fixed Income Investment Policy Group. Prior to joining the firm in 1990, he spent nine and a half years at Moody’s Investors Service, initially as managing director of Western Regional Ratings and then as vice president and managing director of Customer Services. Rosenblum is a member of the Municipal Analysts Group of New York (and past treasurer and chairman), the National Federation of Municipal Analysts (and formerly served on its Board of Governors) and of the Society of Municipal Analysts. He holds a BA in sociology and urban studies from Brooklyn College and an MCP from Harvard University. Location: New York

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