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Global Credit Research - 27 Jan 2011
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'
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
The report, "Combining Debt and Pension Liabilities of U.S.
States Enhances Comparability," is available at 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
* * * * *
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AVP - Analyst
Public Finance Group
Moody's Investors Service
Robert A. Kurtter
MD - Public Finance
Public Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's report dimensions the pension and debt liabilities of U.S. states
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New York, NY 10007
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