WASHINGTON — States may be in for a shock when they see their burden of unfunded pension liabilities, based on a report released Thursday that includes Moody’s Investors Services’ newly adjusted methodology for analyzing such data.
For fiscal year 2011, the accumulated pension burden of all 50 states — as measured by adjusted net pension liability relative to all governmental funds revenues — ranges from Nebraska’s 6.8% to Illinois’ 241%. The median value for all of the states was 45%.
The inaugural 15-page report, “Adjusted Pension Liability Medians for U.S. States,” rates states based on ratios measuring size of their adjusted net pension liabilities relative to several measures of economic capacity: state revenues, gross domestic product and personal income.
The wide variation in net pension liabilities “reflects the differences among states in historical funding efforts, management of benefit levels and the extent to which states assume responsibility for employer pension costs related to teachers and other local government employees in addition to state employees,” the report said.
Marcia Van Wagner, senior analyst with Moody’s, said it’s important for people to understand the variability of the pension liabilities in states.
“Pensions per se is not the monolithic issue,” Van Wagner said. “It really depends on where you are, and what the circumstances are at the state as to whether pension liabilities are presenting a credit pressure to those states.”
Moody’s said the adjusted funded ratio is “less useful for credit analysis than the adjusted net pension liabilities (ANPL)” because it does not indicate the size of pension liabilities relative to an issuer’s resources.
The new ANPL to states’ revenues indicates the strain the pension liabilities are placing on state finances, said David Jacobson, communications strategist with Moody’s Investors Service. It is a better indicator of pension stress than the percentage of the pension plan that is funded because it accounts for the size of a state’s net pension liabilities relative to its resources, he said.
The pension adjustments aim to achieve greater transparency and comparability in Moody’s credit analysis, the report said. The main goal of the report was to provide was better information to investors about state credit, Van Wagner said.
Moody’s released a report in April that described what the pension adjustments were and who they applied to. In that report, Moody’s placed the general bond ratings of 29 local governments and school districts on review for possible downgrade.
Thursday’s report does not put any states on review for downgrade. However, the report noted that the largest accumulated liabilities most often reflect management decisions not to fund contributions at levels reflecting actuarial guidelines. Of the 10 states with the largest pension burdens, six have been downgraded in recent years due to their underfunding, Moody’s said. Earlier this month, Moody’s downgraded Illinois’ general obligation credit rating by one notch for its failure to deal with $100 billion in unfunded public pension liabilities.
Pension liabilities are one of many factors Moody’s considers when determining a state’s credit rating. Local governments have overwhelmingly rejected the new pension adjustments.
“We are presenting our opinion and they have their opinions,” Van Wagner said. “We differ on this issue. Over the longer run especially with the new GASB requirements, there is a culture change in how these liabilities are going to be reported and viewed. It requires some adjustment on everybody’s part and I think states are making that adjustment.”
Moody’s expects to publish fiscal 2012 state net pension liabilities later this year and early estimates show that they are larger than fiscal 2011. “This reflects poor investment performance of pension assets and a downward slide in interest rates, partly offset by the effects of several years of budget reductions on state employee headcount and salaries,” Moody’s said.
