Fitch finds state pension liabilities rose faster than debt

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WASHINGTON — Net pension liabilities as a share of personal income rose in 40 states in fiscal 2017 while tax-supported debt rose by the same measure in only 10, a report released Monday by Fitch Ratings said.

Total net pension liabilities rose to $1 trillion in fiscal 2017 from $892 billion a year earlier, the report also said.

The dollar value of net pension liabilities also rose in 43 states while the dollar value of outstanding tax-supported debt rose in 17 states, the report said.

Fitch uses a 6% discount rate for calculating net pension liabilities compared to the 7.4% average used by the states, which results in higher estimated liabilities.

Only eight statewide pension systems used lower rates in fiscal 2017.

They were Colorado Public Employees Retirement Association – State Division; Kentucky Teachers Retirement System; Minnesota State Employees Retirement Fund; Minnesota Teachers Retirement Fund; New Jersey Teachers Pension & Annuity Fund; New Jersey Public Employees Retirement System; New Jersey Police and Firemen’s Retirement System and the Texas Employees Retirement System.

Financially troubled plans — such as those in Kentucky and New Jersey — are required to use lower discount rates. Low discount rates inflate the estimated pension liabilities.

Moody’s Investors Service, for instance, used a double-A corporate bond index which produced a $3.9 trillion estimate of unfunded pension liabilities.

The Federal Reserve in September used triple-A corporate bond yields to estimate unfunded pension liabilities at $4.1 trillion.

Moody’s issued a report on the Fed’s new estimate, stressing that it involved “an accounting change, not an economic change, and thus does not impact the credit quality of state and local governments.”

“Nonetheless, the Fed's revision underscores the magnitude of these obligations,” Moody’s said. “Unlike its previous method, the Fed now includes expectations of future salary growth in its measurements of state and local government pension liabilities.”

Under Governmental Accounting Standards Board (GASB) rules, states use discount rates mostly linked to assumed rates of return on their assets. Net pension liability is accounting terminology for what is listed on the balance sheet of a governmental unit while unfunded pension liability is a more general term.

Douglas Offerman, senior director of Fitch Ratings who was the lead author of the new report, said it was not intended to be used as part of the policy debate over discount rates.

He declined to comment on the Fed’s September action.

“The goal of today’s report is to describe what states are reporting on their own balance sheets for their pension liabilities,” he said, noting the analysis relied on the latest GASB rules.

“To me the most interesting take-away of the report is that by our measures roughly 40% of state pension liabilities are for non-state employees,” Offerman said.

The largest subset of that 40% are teachers. Also included are police and local government employees.

These non-state employees are significant in the states with the highest pension burdens.

Fitch said it calculates state debt and adjusted pension liabilities compared to personal income using it as a base from which liabilities will be paid. That is how the rating agency assesses long-term liability to evaluate overall credit quality.

The median state, according to Fitch, has a low liability burden that is manageable compared to its resources.

By this measure, Illinois had the highest burden of 29% of personal income in Illinois to a low of 1.5% in Nebraska.

Defined-benefit pension obligations are the primary driver of this wide range, Fitch said.

Net pension liability was calculated at 23.4% of personal income in Illinois, compared with 1.2% in Florida.

Fitch said state debt fell into a narrower range, measuring 9.6% of personal income in Hawaii compared to less than 1% in eight states.

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Public pensions State and local finance Government finance GASB Fitch Moody's Federal Reserve Washington DC
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