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Research Announcement:

Moody's - Unfunded US state pension liabilities surge in fiscal 2017 due to poor investment returns

27 August 2018

New York, August 27, 2018 -- The majority of US states experienced a sharp increase in their adjusted net pension liabilities (ANPL) in fiscal year 2017, owing to poor investment returns in fiscal 2016, Moody's Investors Service says in a new report. However, favorable investment returns in fiscal 2017 and 2018 are expected to lead to a decline in pension liabilities for the next two fiscal years.

"Fiscal 2017 reporting shows total state ANPL at $1.6 trillion, or 147.4% of state revenue, up significantly from $1.3 trillion and 122%, respectively, in fiscal 2016," said Moody's Analyst Pisei Chea. "As a result, state ANPLs grew to 8.4% of US GDP in fiscal 2017 from 7.0% in fiscal 2016 as the unfunded liabilities grew by 25.5%."

While ANPL percentage growth varied among states, Moody's says the greatest percentage increases occurred in Delaware (Aaa stable), Hawaii (Aa1 stable), Oregon (Aa1 stable) and South Dakota (Aaa stable), which all grew by more than 60%. For a handful of states, including Michigan (Aa1 stable), New York (Aa1 stable), Washington (Aa1 stable), and Utah (Aaa stable), ANPL grew by less than 5%.

Illinois (Baa3 stable) had a 25% growth in ANPL and saw its adjusted net pension liabilities reach $250 billion, or 601% of state revenues (in 2017, before the state's 2018 tax increase), an all-time high for any state. The median ANPL for FY 2017 was $12 billion, or 106.8% of revenues.

Many states were also not making sufficient pension contributions to prevent ANPL from growing, which Moody's calls a "tread water" contribution level. The median pension contribution as a percent of the tread water indicator for all states was 95.5%, with 22 states over the 100% threshold, and New Jersey (A3 stable) displaying the weakest contribution ratio at 29.6%.

Investment returns improved in the last two fiscal years. The impact of these stronger investment returns will partly reverse the negative impact of low returns in fiscal 2015 and 2016 and the benefit will begin to show in next year's pension medians. Moreover, some of the fiscal 2017 spike in liabilities will be offset by higher interest rates.

"We project aggregate state ANPL will decline to $1.5 trillion when pension liabilities are reported in fiscal 2018, a 6.6% decline from fiscal 2017 ANPL," Chea says. "The aggregate state ANPL will again decline about 4.7% to $1.4 trillion in fiscal 2019 reporting, reflecting continued favorable investment returns in fiscal 2018 and a slight increase in the June 30 discount rate."

Healthy revenue growth will also help states service their pension costs. However, rising costs will continue to weigh on many states, including Illinois and Connecticut (A1 stable), where fiscal 2017 fixed costs for debt service, retiree health, and pensions on a tread water basis exceeded 30% of own-source revenue. Weak demographics in some states, such as West Virginia (Aa2 stable) and Maine (Aa2 stable), will present challenges for funding pension liabilities.

This year also saw some notable pension reforms in Ohio (Aa1 stable), Colorado (Aa1 stable), Minnesota (Aa1 stable), and Kentucky (Aa3 stable). This will help these states reduce future pension liabilities.

Subscribers can access the report "States – US: Medians - Adjusted net pension liabilities spike in advance of moderate declines," at: http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1129146

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Pisei Chea
Analyst
PPIF
Moody's Investors Service, Inc.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Timothy Blake
MD-Public Finance
PPIF
Moody's Investors Service, Inc.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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JOURNALISTS: 1 212 553 0376
SUBSCRIBERS: 1 212 553 1653

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