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Will Pension Woes Hurt State Ratings?
Lisa Lambert of Reuters reports, Pension issues may hurt state ratings: Moody's:
Some As concerns grow over the In Connecticut, Hawaii, Illinois, Kentucky, Nebraska and South Dakota have the lowest. "Large Problems New "In general, states' IN THE TRILLIONS? The But $3 trillion could be nearer the Regardless of the exact amount, states have to find a way to adequately fund pensions. "More Money
"Employee Moody's, too, says the problem is getting bigger. "Unfunded "Moreover, pension liabilities may be understated because of current governmental accounting standards," it added. The One After But, the Even though the liabilities are in the billions of dollars, "when you compare them to GDP it's still low numbers," Larkin said. "And
In a separate article, Simone Baribeau of Bloomberg reports, Moody's Says Massachussetts Among States With Highest Debt, Pension Burden:
U.S. states face so much pressure to fund pensions for public
employees that it could hurt their credit ratings, Moody's Investors
Service said on Thursday.
financial health of many states after the 2007-2009 recession and how
they will cut spending to cope, the ratings agency combined pension and
debt data to rank the liabilities of each state.
the past, Moody's evaluated credit risks from pensions and debt levels
separately. Lower credit ratings could raise the costs to states of
borrowing money.
Massachusetts, Mississippi, New Jersey and Rhode Island, along with
Puerto Rico, have the largest debt-and-pension loads, Moody's found.
and growing debt and pension burdens have been, and will continue to
be, contributing factors in rating changes," Moody's said.
with pensions -- which states have underfunded by at least $700
billion -- include weak returns on investments, not enough money set
aside, impending retirements of "Baby Boomers" born in the late 1940s
through mid-1960s, and Americans living longer, Moody's said.
York, Delaware and California are often cited for large debt burdens
but do not have the highest combined long-term liabilities, Moody's
analyst Ted Hampton said in a statement.
rankings for debt and pension combined parallel their rankings for debt
alone," Hampton said but he added: "not all states with large debt
burdens also suffer from weak pension funding."
$700 billion underfunded figure is a conservative estimate for how
much money states will need to cover the pension promises they have
made to their employees.
mark, one study warned last year. States expect too generous a return
on investments made by their pension funds, said the study by Joshua
Rauh of the Kellogg School of Management at Northwestern University.
and more, it's going to take up a larger share of their ... budgets,"
said Kil Huh, director of research at Pew Center on the States, which
has been closely following the pension issue.
flows from three major sources into pension funds: employee
contributions, the employing governments and investment returns.
contributions have gone down and, at the same time, employer
contributions because of the fiscal crisis haven't been there," Huh
said.
pension liabilities have grown more rapidly in recent years because of
weaker-than-expected investment results, previous benefit enhancements
and, in some states, failure to pay the full annual required
contribution," the report said.
Moody's report "will shed more light upon the states which have
eliminated or underfunded their yearly contributions for pension
liabilities simply as a way to manage their finances," said Thomson
Reuters Senior Market Strategist Daniel Berger.
dramatic solution to the pension problem would be allowing states to
declare bankruptcy, which some congressional Republicans want. Then,
they could renege on pension promises made to employees.
being criticized for missing risks in the housing boom, Moody's is
showing with this report it's "not asleep at the wheel" on the pension
threat, said Richard Larkin, senior vice president and director of
credit analysis at Herbert J Sims & Co. in New York.
report also showed the liabilities are manageable, he added. For
example, Moody's found Hawaii's pension-and-debt load is equal to 16.2
percent of its gross domestic product, the biggest proportion of all the
states.
it's still relatively much lower than these problem countries people
keep comparing them to," he said, referring to recent fears that
California or Illinois will soon be plunged into troubles similar to
those Greece or Ireland are facing.
Moody’s
Investors Service provided a combined measurement of debt and pension
liabilities for the first time to analyze U.S. states’ creditworthiness
after “rapid” growth of their unfunded retirement obligations.
The
joint figures released today make it easier to compare fixed costs
among states and with corporate-bond issuers, Moody’s said. The company
previously included pension liabilities separately in evaluating states.
It revisedmunicipal ratings in April to make them more compatible with
corporates.
“Greater comparability and transparency”
will come from the new metric, Robert A. Kurtter, managing director for
public finances at New York-based Moody’s, said in a telephone
interview. “In a corporation, you look at them together. As a
government, we would look at them together also as the fixed costs that
the government has to pay.”
Less than
half the 50 state retirement systems had assets to pay for 80 percent
of promised benefits in their 2009 fiscal years, according to data
compiled by Bloomberg. Two years earlier, only 19 missed the mark.
Illinois covered just 50.6 percent in 2009, the lowest ratio, which
actuaries say shouldn’t be less than 80 percent.
Hawaii,
Massachusetts and Connecticut are among the states with the largest
combined debt and pension obligations relative to their economies and
revenue, Moody’s said today.
Parallel Rankings
In
general, states’ rankings for debt and pensions combined parallel their
rankings for debt alone, it said. Hawaii, Massachusetts and Connecticut
also have the largest ratios of bonded debt to personal income, Moody’s
said.
“Not all states with large debt burdens also suffer from
weak pension funding,” Ted Hampton, a Moody’s analyst, said in the
release accompanying the report. New York, Delaware and California --
states with comparatively large debt burdens -- are not among the states
with the highest combined long-term liabilities.”
Moody’s
said that states may understate their pension liabilities and that
pressure to fund retirements will continue to have a “negative impact”
on state ratings.
“We’ve become more concerned about the
unfunded pension liabilities and the costs they’re creating for
governments at a time when they’re already stressed,” said Kurtter, who
was among the authors of today’s report.
For
some states, such as Illinois, which is rated A1 and has a negative
outlook, growing debt and pension burdens have already contributed to
rating changes, Moody’s said.
States’ control over revenue and
spending may help them address the growth in pension liabilities, the
report said. As a group, states are still “highly rated” at A1 or
higher, it said, because of their tax and budget powers.
On its website, Moody's put out this press release:
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 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.
Unfunded pension liabilities will continue
wreaking havoc on state finances, forcing politicians to take bold
measures to shore up these pension plans. I welcome Moody's new
initiative focusing on current and projected pension liabilities and
taking a more integrated approach in evaluating state finances. I would
take it a step further and start evaluating all aspects of pension fund
governance, analyzing which state pension plans are following best
practices and which are most vulnerable to further deterioration in the
future.
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It is much worse than anyone wants to admit. There is no way those pensions can be funded.
I can feel a law coming that adds a VAT for pensions ( Govt only-of course)
Then state sales tax on all things ordered online at 2x the rate of in-state operations.
Those pensions are hallowed ground and while a few may make the sound of grinding screaming dry gears type progress to stop pension abuse, it will be far easier just to do the National VAT plus state and local consumption tax increases on everything bought. There will of course be VAT-free and State Tax-free stores for Govt workers along with C-Suite Bankers for all goods purchased with massive bulk discounts at a mere 5% over cost. That will require a temporary increase in every tax in state to build the mammoth warehouses and hire thousands of employees on contract to serve it up piping hot while new investigators brutally slam any private sector turd who tries to shop there. Three years in the for profit prison who pays a prisoner tax for those homeless assholes trying to feed their families. Their Kids go to jail too.
Anything Govt workers want, they'll get and the rest of us private sector slime will pay for it because by God Govt workers sacrifice and are better and nicer than us. Why? Becuase Stewart Smalley says so.
That wouldn't surprise me. But also very likely is what seems to be the last dash for the real leftover cash; namely a raid on the retirement funds.
I.e. seizing 401K's etc., under the banner of "saving retirement", and putting everything in one big pot. Yeah, right. That won't be for saving mine.
This, btw, has already been done in some European countries; most recently Ireland's retirement funds being used to save the German banks.
Excellent info, Leo... Thanks.
Leo -
You lost me at "Moody's is taking a closer look..."
Seasmoke -
I think you have it about right.
may as well take all the pension money and go to Vegas and put it on black on the roulette wheel....win and you double up, lose and the suckers who own houses in your state are still responsible for the difference
And it will force investment managers to chase greater and greater returns, while trying to offset the additional risk with derivatives, thereby setting up a true seismic disturbance and bankrupting many states, and making retirees expendable population.
...on purpose...
no California ???
Well, the article does mention California. But I have to strongly question the research. IIRC, California had $600 Billion in debts, including unfunded pension obligations. This was according to the most independent study to date, done by Stanford last Summer. This result strongly differed from the "official" report. But the official numbers were so questionable that the Governator hired Stanford to give him an honest answer. Of course, all the pols were upset by the truth.
So, it would seem that this article is basing its conclusions upon the "On the Books" numbers, and not the real numbers. If someone has data to the contrary, please let me know. But my impression is that the States really aren't looking for honest numbers to be made public.
In any case, nice article, Leo.