Seix Muni Perspectives - Pension Crisis (October 2017)
Unfunded pension liabilities continue to be a key credit concern for State and Local Governments across the municipal market. With Fiscal Year 2016 numbers now nearly fully reported, the median funding ratio for states declined to 72%, an 8% decline from 2015 to 2016. Investment returns averaged below 1% for the year, dramatically underperforming most plan’s projected returns of 7%-8%. Additionally, contributions in 48 out of 50 states were below the level required to maintain the prior year’s funding level.
Investment returns are typically the largest driver (64%) of a fund’s performance as the assets held in the fund act as the largest lever on overall funding levels. With the implementation of GASB 67 and 68, plans have been required to adjust their Actuarial assumptions to better reflect past performance and current market conditions. This has generally decreased reported funding levels as return assumptions have returned to more reasonable levels (7-8% vs 10-12%).
The assertions in this perspective are Seix Investment Advisors’ opinion.
Investment Risks: All investments involve risk. Debt securities (bonds) offer a relatively stable level of income, although bond prices will fluctuate providing the potential for principal gain or loss. Intermediate-term, higher-quality bonds generally offer less risk than longer-term bonds and a lower rate of return. Generally, a portfolio’s fixed income securities will decrease in value if interest rates rise and vice versa. A portfolio’s income may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax. There is no guarantee a specific investment strategy will be successful.
This information and general market-related projections are based on information available at the time, are subject to change without notice, are for informational purposes only, are not intended as individual or specific advice, may not represent the opinions of the entire firm, and may not be relied upon for individual investing purposes. Information provided is general and educational in nature, provided as general guidance on the subject covered, and is not intended to be authoritative. All information contained herein is believed to be correct, but accuracy cannot be guaranteed. This information may coincide or conflict with activities of the portfolio managers. It is not intended to be, and should not be construed as investment, legal, estate planning, or tax advice. Seix Investment Advisors does not provide legal, estate planning or tax advice. Investors are advised to consult with their investment processional about their specific financial needs and goals before making any investment decisions.
Past performance is not indicative of future results.
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