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Fixed costs create budgetary hurdles for state and local governments
February 5, 2019(7.49mins)
Alexandra Parker
In this edition of Moody’s Talks … Naomi Richman, Senior Vice President in the US Public Finance group, and Alexandra Parker, Managing Director in US Public Finance, discuss the credit implications of fixed costs — debt service, pensions and retiree healthcare — on state and local governments.
State and local government – US: Retiree benefits drive growth in fixed costs, posing greater challenges than debt
Fixed costs — the combination of debt service, pension contributions and retiree healthcare — continue to rise for many US state and local governments. While retiree benefits (pensions and healthcare) will continue to drive this trend, the growth level is heavily dependent on unpredictable factors such as pension investment performance and workforce demographics. Debt service costs, on the other hand, are largely stable and unlikely to increase materially, continuing the trend of the last decade. Still, total fixed costs create budgetary challenges for some governments, potentially affecting their ability to deliver core services, a dynamic also known as “crowd-out” risk.