While contributions to state and local pension plans are growing steadily, there remains considerable downside risk to the credit quality of sponsoring governments due to volatile investments, said a report from Moody’s Investors Service.

The report, “Vulnerability to pension investment losses remains high despite slowing costs,” said the returns that state and local plans are achieving due to investments in equities and alternatives should lead to stable contribution growth over the next two fiscal years. However, these same investments can also lead to significant downside risk.

“Pension investment risk remains a key credit issue for many state and local governments,” Tom Aaron, vice president and senior analyst at Moody’s, said in a phone interview. “Not all, but many, have downside exposure to capital market performance.”

The report says that if a market downturn were to occur, it could cause significant credit damage on some governments, especially if combined with a slowdown or decline in revenue.

“If, for example, we do get an equity market correction, that would have huge consequences,” Mr. Aaron added.

Read the whole article at P&I Online.

This article quotes selections from “Government credit ratings vulnerable to downside pension risk – Moody’s,” by James Comtois in P&I Online, December 12, 2019.