Weak 2016 Returns Spur Unfunded State Pension Liabilities

However, Moody’s says strong 2017, 2018 returns will lead to a drop in liabilities.

Although poor investment returns in 2016 spurred a sharp rise in the adjusted net pension liabilities of most US states in 2017, strong investment returns during the ensuing two years are expected to lead to a decline in pension liabilities over the next two years, according to Moody’s Investors Service.

“We project aggregate state ANPL [adjusted net pension liabilities] will decline to $1.5 trillion when pension liabilities are reported in fiscal 2018, a 6.6% decline from fiscal 2017 ANPL,” Moody’s Analyst Pisei Chea said in a release. “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.”

A new report from Moody’s said fiscal 2017 reporting shows total state adjusted net pension liabilities at $1.6 trillion, or 147.4% of state revenue, up from $1.3 trillion and 122%, respectively, in fiscal 2016. As a result, state adjusted net pension liabilities grew by 25.5% to 8.4% of US GDP in fiscal 2017, up from 7.0% in fiscal 2016.

The report found a wide disparity of growth in ANPL from state to state. It said the largest increases were reported in Delaware, Hawaii, Oregon, and South Dakota, all of which saw their adjusted net pension liabilities grow by more than 60%. Meanwhile Michigan, New York, Washington, and Utah saw their adjusted net pension liabilities grow by less than 5%.

Illinois stood out with a steep 25% rise in adjusted net pension liabilities to $250 billion, or 601% of state revenues, which Moody’s said was an all-time high for any state, and well above the median of $12 billion, or 106.8% of revenues for fiscal year 2017.

The Moody’s report also said many states were not making sufficient pension contributions to prevent the liabilities from growing, providing what the firm referred to as a “tread water” contribution level. It said the median pension contribution was only 95.5% of its tread-water indicator for all states, with 22 states over the 100% threshold, and New Jersey reporting the weakest contribution ratio at 29.6%.

However, the report said improving investment returns during the last two fiscal years will partly reverse the negative impact of low returns in fiscal 2015 and 2016, and that it expects the benefit will begin to show in 2019.

“Healthy revenue growth will also help states service their pension costs,” said Moody’s, “however, rising costs will continue to weigh on many states, including Illinois and Connecticut where fiscal 2017 fixed costs for debt service, retiree health, and pensions on a tread water basis exceeded 30% of own-source revenue.”

It added that weak demographics in states such as West Virginia and Maine will present challenges for funding pension liabilities, while pension reforms in Ohio, Colorado, Minnesota, and Kentucky will help reduce future pension liabilities in these states.

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