Announcement: Moody's report dimensions the pension and debt liabilities of U.S. states
News Release from Moody’s Investors Service
New York, January 27, 2011 -- A new report by Moody's Investors Service presents combined net tax-supported debt and pension liability figures for the U.S. states, providing a clearer view of how each factors into the evaluation of states' total current liabilities.
"Pensions have always had an important place in our analysis of states, but we looked separately at tax-supported bonds and pension funds in our published financial ratios," says Moody's analyst Ted Hampton. "Presenting combined debt and pension figures offers a more integrated -- and timely -- view of states' total obligations."
Given the level of fiscal stress being felt by most states and the prospects for sluggish economic growth and slow revenue recovery, pension funding pressures will continue to have a negative impact on state credit quality and state ratings. Moody's also recognizes that, as currently reported, pension liabilities may be understated.
Of the 50 states, those with the highest debt and pension funding needs include Connecticut, Hawaii, Massachusetts, and Illinois, the report finds.
"In general, states' rankings for debt and pension combined parallel their rankings for debt alone," says Hampton.
Hawaii, Massachusetts, and Connecticut -- the three states with the largest ratios of bonded debt to personal income -- are also among states with the largest combined debt and pension obligations relative to their economies and revenues.
"Not all states with large debt burdens also suffer from weak pension funding, however," Moody's Hampton adds. "New York, Delaware, and California -- states with comparatively large debt burdens -- are not among the states with the highest combined long-term liabilities."
Some states, notably Maryland and South Carolina, have strong credit ratings despite relatively high debt and pension burdens, underscoring that these liabilities are only one of many factors that contribute to state ratings.
Moody's presentation of combined debt and pension figures as part of a more integrated view of states' total obligations follows a period of rapid growth in unfunded pension liabilities.
"Pension underfunding has been driven by weaker-than-expected investment results, previous benefit enhancements, and, in some states, failure to pay the annual required contribution to the pension fund," says Hampton. "Demographic factors -- including the retirement of Baby Boom-generation state employees and beneficiaries' increasing life expectancy -- are also adding to liabilities."
Moody's says that the evaluation of current and projected pension liabilities is an important area of focus in its rating reviews. For some states, such as Illinois, which is rated A1 and has a negative outlook, large and growing debt and pension burdens have already contributed to rating changes.
States as a group are highly rated -- currently A1 or higher -- because of their control over revenue and spending that may help address the recent growth in their pension liabilities.
"Many states are beginning to respond to this growing challenge by increasing contribution requirements, raising minimum retirement ages, and undertaking other reforms," Moody's Hampton concludes.
The report, "Combining Debt and Pension Liabilities of U.S. States Enhances Comparability," is available at www.moodys.com.
Moody's earlier reports on public pension liabilities covered specific aspects of the subject area, including increasing government pension contributions, the cost pressures on state and local governments, and the impact on pension funding of stock market declines. The effect of pension obligations on state and local government credit ratings will be the subject of further reports from the rating agency in coming months.
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LINK: Full Report (registration required)
Hawai`i Free Press had it first, but we’re glad Moody’s is catching up to us: