Pub. 11 2022 Issue 6 37 liabilities and associated expenses. Pension liabilities are computed using assumptions for wage growth and expected inflation. If those assumptions increase or are too low, pension liabilities will increase. Some pension plans have cost of living adjustments based on inflation. Those plans will have an increase in current payouts in addition to an increase in future liability. Further, pension assets will likely suffer from poor investment returns this year. The trend of movement toward riskier asset classes led to favorable outcomes in 2021 when many plans had record investment gains. However, the opposite may be true in this volatile environment where equities and bonds have declined in value. Moody and S&P both project that all the investment gains pension plans enjoyed last year will be, or already have been, reversed. Assets decreasing while liabilities increase means that unfunded liabilities will rise, and so will required contributions from employers. This may cause budget pressure for some municipalities. On a more positive note, higher inflation and/or interest rates could increase the discount rate used to determine the present value of pension liabilities. A higher discount rate means a lower estimate of pension liabilities, all else equal. Also, inflation could lead to increases in revenue, particularly for those municipalities that rely heavily on income tax revenue or sales tax revenue derived from the sale of non-discretionary items. Discretionary spending is threatened by a potential recession as well as higher interest rates. Property tax revenue should increase as well since home prices have been increasing significantly. Higher home prices will lead to higher assessed valuations if home values do not depreciate to last year’s level or lower. Whether or not revenues rise by more than expenses will vary from issuer to issuer. Many issuers have well-positioned reserves right now to help cope with increasing costs and a potential recession in the short term. However, unfunded pension liabilities and growing leverage will continue to be a concern for some local governments. Many healthcare issuers, especially senior living facilities and special development entities, have experienced credit deterioration during the pandemic. They remain particularly vulnerable to further budgetary pressure and credit impairment due to current economic conditions. The Baker Group’s Credit Criterion Check monitoring system helps to identify issuers susceptible to weakening credit quality. Please contact your Baker representative for more information. Dana Sparkman, CFA, is Senior Vice President /Municipal Analyst in The Baker Group’s Financial Strategies Group. She manages a municipal credit database covering more than 150,000 municipal bonds, providing clients with specific credit metrics essential to assess municipal credit. Dana earned a bachelor ’s degree in finance from the University of Central Oklahoma as well as the Chartered Financial Analyst designation. Contact: 405-415-7223, dana@GoBaker.com.
RkJQdWJsaXNoZXIy ODQxMjUw