Moody's Says Pension Holes May Hurt US State Ratings

Moody’s Investors Service has said in a report that pension obligations will continue to weigh on states’ credit ratings.

(January 28, 2011) — Moody’s Investors Service has provided a combined look at debts and pensions for the first time to analyze states, showing that some US states face such intense pressure to fund pensions that it could hurt their credit ratings.

The report is a result of escalating concerns over the ability of many states to fund their pensions following the recession. “Large and growing debt and pension burdens have been, and will continue to be, contributing factors in rating changes,” Moody’s said.

The joint figures, which rank states’ creditworthiness after “rapid” growth of their unfunded retirement obligations, make it easier to compare fixed costs among states and with corporate-bond issuers, according to Moody’s. Previously, the company had included pension liabilities separately in evaluating states.

Connecticut, Hawaii, Illinois, Kentucky, Massachusetts, Mississippi, New Jersey and Rhode Island, along with Puerto Rico, have the largest debt-and-pension loads, Moody’s found, while Nebraska and South Dakota have the lowest.

According to the ratings agency, state pensions, which are underfunded by at least $700 billion, face issues that include low returns on investments, an inadequate amount money being saved, the impending retirement of “baby boomers” born in the late 1940s through the 1960s, and Americans living longer than expected. “Unfunded 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, adding that states may understate their pension liabilities and that pressure to fund retirements will continue to have a “negative impact” on ratings. “Moreover, pension liabilities may be understated because of current governmental accounting standards.”

In September, Moody’s revised its outlook from stable to negative for both Illinois and New Jersey, largely due to their pension liabilities.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742