NEW YORK – Local governments face major financial challenges over the next few years due to declining tax revenue and the fast-rising cost of public employee pensions, analysts warned this week.
The economic crisis has caused the value of the nation’s 2,600 state and local government pension funds to fall by about 40 percent, The Financial Times reported.
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The London paper specifically cited the City of Providence’s pension fund as one of those in poor shape. The city has set aside less than 50 percent of the money it will need to cover its future obligations, the paper said.
Phillip Silitschanu, a senior analyst at the consulting firm Aite Group, told the FT that state and local pension plans “could face a cash flow collapse” because, in order to meet their current obligations, they are selling off assets that have lost more than one-third of their value in recent months.
“As terrible a predicament that everyone thought these pension funds were in three or four years ago, they are much worse now,” Silitschanu added.
With the annual cost of pensions continuing to increase, taxpayers soon could be forced to increase their contributions to the funds, the FT said.
Separately, in a special report released this week, Moody’s Investors Service issued a blanket warning about the fiscal health of all city and town governments in the United States, The New York Times reported.
Although Moody’s has warned about individual municipalities in the past, the report marks the first time the ratings agency has offered a negative outlook on the creditworthiness of all the nation’s cities and towns from Rhode Island to California, The Times said.
If individual municipalities have their credit ratings downgraded later this year, they will face higher borrowing costs, which would put a further strain on their budgets.
The firm’s analysts said they were concerned about falling tax revenue, as well as the impact of the complex financial instruments that some cities and towns bought before the credit crunch began, the paper said.
The report cited particular risks for governments that depend on revenue from financial services, tourism and manufacturing, and expressed doubt about whether governments would be able to boost taxes amid a grinding recession.
“Taxpayers, worried about their own financial condition, are more resistant than ever to increasing property or other local taxes,” The Times quoted the report as saying.
However, Thomas G. Doe, president of Concord, Mass.-based Municipal Market Advisors, cautioned that the report is “not a sounding of the alarm for default.”
