WASHINGTON — Adjusted net pension liabilities for most states grew larger in fiscal 2012 because of minimal investment returns and a decrease in the interest rate index used to derive the present value of liabilities, Moody's Investors Service said in a report issued Thursday.
However, fiscal 2012 — which is July 1, 2011 through June 30, 2012 for most states — may reflect a "cyclical peak" because of strong stock market returns, rising interest rates, and pension reforms, the rating agency said in the report, U.S. State Pension Medians Increase in Fiscal 2012.
This is the second pension medians report that Moody's has issued under its new ratings methodology, which applies different discount rates or levels of risk that are based on the likelihood pension benefits will be paid, rather than on the assumed rate of return on investments. It also allocates liabilities based on membership in cost-sharing plans. It's first medians pension report on adjusted net pension liabilities was for fiscal 2011 and released on June 23, 2013.
In these reports, Moody's compares the size of net pension liabilities, adjusted for by its new methodology, to governmental revenues to determine a state's credit rating because this is indicative of the strain the liabilities are likely to place on finances.
In this latest report, Moody's found that adjusted net pension liabilities (ANPLs) rose for 38 states in fiscal 2012.
The ANPL as a percentage of governmental revenues ranged from 12.2% for Nebraska to 318% for Illinois during fiscal 2012, with the median ratio increasing to 63.9% from 45.1% in fiscal 2011.
Besides Illinois, states with the highest pension burdens included Connecticut, which has a ratio of 243.4% and is rated Aa3 stable, and Kentucky, which has a ratio of 211.3% and is rated Aa2 negative.
Other than Nebraska, which has no general obligation debt, states with the lowest pension burdens were Wisconsin, which is rated Aa2 stable and has a ratio of 13.8%, and New York, rated Aa2 positive with a 16,5% ratio.
The shifts from fiscal 2011 to fiscal 2012 included three states that moved to the top ten ratios of ANPL to revenue. They were Maine, rated Aa2 negative with a ratio of 138.4%, Texas, rated Aaa stable with a ratio of 135.9%, and Kansas rated Aa1 negative with a 133.6% ratio. Kansas' ANPL increased dramatically over the past fiscal year because it now includes the liability for the schools' portion of the state's pension plan, Moody's said. These three states replaced New Jersey, Colorado and Pennsylvania.
Three states also moved into the ten states with the lowest ratios. They were Washington, with a ratio of 25.2% and a rating of Aa1 stable, Arizona, at 29.0% with a Aa3 positive rating and Virginia, at 31.6% with a Aaa stable rating. They replaced South Dakota, Florida and Idaho, which had been in that group but are no longer.
"It was a tough investment year for public pension funds with June 30, 2012 reporting dates as returns came in near flat at approximately 1.2%," Moody's said, citing data from Callan Associates.
But Moody's said most states have three-year average ANPLs that remain in the low-to-moderate range relative to measures of their capacity to pay, such as governmental revenues.
The rating agency noted that public pension funds with a June 30, 2013 reporting data had a median investment return of 12.4%, driven by gains in U.S. and international stocks, according to Wilshire Associates. In addition, Moody's said, interest rates are rising from historic lows as the economy strengthens.
