The city of Jacksonville is about to enjoy the benefits of a credit rating boost. Moody’s Investors Service moved the Florida city’s credit rating to Aa2 from Aa3, citing pension reform among the main reasons for the upgrade. The credit rating increase will allow the state to borrow funds at a lower interest rate and invest in more infrastructure and public services.
Five years ago, the Jacksonville City Council approved a pension reform package while enacting innovative changes, reducing debt by more than $585 million and adding over $155 million to pension reserves. A key element of the pension reform that led to reduced debt was closing the city’s three pension plans to new public employees in 2017. Since that change was put in place, over $715 million has been used to grow Jacksonville’s economy and invest in public services for its population. In addition, credit rating agencies, such as Moody’s, assign “grades” to governments’ ability and willingness to service their bond obligations, taking into consideration the jurisdiction’s economic situation and fiscal management. Since the pension reform reduced budgetary pressure, it improved the chances of the city getting a credit upgrade.
Moody’s cited the closing of three pension plans to new employees as a factor for the rating improvement along with others:
• Material improvement in the city’s cash and liquidity position (issuer and non-ad valorem ratings.)
• Significant reduction in the growth of the city’s pension obligations (issuer and non-ad valorem ratings).
• Material economic improvement reflected in tax base growth, lower unemployment and increased median family income (issuer and non-ad valorem ratings).
• Improved coverage from pledged revenues (special tax ratings).
Facing billions in unfunded public pension liabilities and increasingly expensive debt service payments, city leadership decided to stop adding risk to the budget by making the defined contribution plan the primary vehicle of a secure retirement for new hires beginning in 2017.
In addition, Jacksonville prioritized paying down the $2.86 billion in unfunded retirement benefit liability owed to current employees and retirees over the coming decades. While the city does not accumulate any pension debt from new hires, existing pension promises previously made to workers with defined benefit retirement accounts must be fulfilled. Overall, the pension reforms reduced the city’s risk, brought long-term costs under control, and improved pension funding policy overall.
The 2017 pension reform is expected to lower unfunded pension liabilities and get the city’s pension plan closer to 100% funded in the coming years. Since getting existing liabilities under control makes the city more likely to honor its future debts, it inevitably has a positive effect on the city’s credit rating.
When a city like Jacksonville receives a credit rating upgrade, it can issue bonds at a lower interest rate. This process is similar to an individual becoming eligible for lower interest rates as their credit scores improve. With lower interest rates available, the city can lower long-term costs and has more flexibility to invest in infrastructure projects and other public services.
“Roads and bridges and programs, parks, libraries, public health, and safety. All of that impacts our community and our citizens as they go about their daily lives. These things that we just sometimes take for granted that, you know, take a lot of money to keep in good working shape,” said Joey Grieve, the city’s chief financial officer, in a recent interview.
Jacksonville’s experience shows how sensible public pension reforms can positively impact the fiscal outlook of a major city while also improving public workers’ retirement security. The full effects of Jacksonville’s 2017 pension reform will be realized over decades, but it is clear from Moody’s credit rating upgrade that the reform has already contributed to improving the city’s finances.
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