Understanding the Long-Term Consequences of Today’s Public-Sector Labor Market

By:

Build America Mutual

March 6, 2023 - (2 min read)

Municipal Finance

Post-COVID turnover is changing the face of city workforces, with important consequences for near- and long-term budgeting decisions.

Elevated numbers of retirements and resignations are making it harder to maintain services and forcing city leaders to consider wage increases, benefit enhancements, and other workplace policy changes that can help attract and retain workers. But leaders should keep in mind that the policies they adopt can also have long-term fiscal consequences – potentially increasing pension contributions and even influencing long-term bond ratings.

Many municipal bond analysts consider pension risk – the possibility that a city’s pension and other post-employment benefit costs grow so much that they impair the government’s ability to pay its debts – and an elevated risk profile can lead to increased costs for improvements to roads, water and sewer infrastructure, and other essential assets.

Pension risk profiles can change quickly: Actuaries use assumptions about employee demographics when they forecast a pension plan’s long-term liabilities as part of an annual valuation. When the actual decisions made by employers differ from those assumptions, the plan’s funded ratio can also shift – for example, if governments provide outsized salary increases or make benefit changes to maintain service levels and/or avoid remaining-employee burnout.

In a new white paper, I discussed the drivers of those risks – from a broad-based increase in salaries to the creation of new pension “tiers” or the addition of retiree health benefits – and how subtle shifts can make a big difference. For instance, one-time bonuses could have less of an impact on pension risk than a similar-sized salary increase because those payments may not be counted as pensionable compensation in a given pension plan.

Details matter. City leaders need to understand the specific provisions of their pension plans before they can fully account for the long-term costs of today’s decisions, but it’s worth the effort. Thinking about the pension and OPEB implications of new labor policies will allow cities to spot potential changes to a pension plan’s funding status and contribution needs before they show up in the annual financial reports.

About the Author

Les Richmond is Vice President and Pension Actuary for Build America Mutual, NLC’s preferred provider of municipal bond insurance.

About the Author

Build America Mutual

About the Author

Municipal bonds finance nearly three-quarters of all public infrastructure in the U.S. Build America Mutual insurance maximizes the safety and stability of investing in U.S. municipal bonds and helps Cities…