To present a more integrated and timely view of states’ total debt obligations, Moody’s Investors Service on Thursday announced that for the first time it will combine net tax-supported debt and unfunded pension-liability figures when evaluating state ratings.
“Pensions have always had an important place in our analysis of states, but we looked separately at tax-supported bonds and pension funds in our published financial ratios,” Moody’s analyst Ted Hampton said in a report.
Moody’s is taking the new approach to provide a clear view of how tax-supported debt and pension liabilities factor into the evaluation of states’ total current liabilities. It comes on the heels of a period of rapid growth in unfunded pension liabilities, which have also been reportedly understated in some states.
“Pension underfunding has been driven by weaker-than-expected investment results, previous benefit enhancements, and, in some states, failure to pay the annual required contribution to the pension fund,” Hampton wrote.
Moody’s said evaluating current and projected pension liabilities plays a key role in its rating reviews.
Large and growing debt and pension burdens have already contributed to rating changes among some states, like Illinois, it pointed out.
The agency expects funding pressures will continue to have a negative impact on state credit quality and ratings because of the continued fiscal stress among states, as well as the potential for sluggish economic growth and slow revenue recovery in general.
Moody’s identified Connecticut, Hawaii, Massachusetts, and Illinois as the states with the highest debt and pension funding needs. Those are the three states with the largest ratios of bonded debt to personal income and are also among the states with the largest combined debt and pension obligations relative to their economies and revenues, the report said.
States with large debt burdens, like New York, Delaware, and California, on the other hand, are not among those with the highest combined long-term liabilities.
Moody’s also pointed out that not all states with large debt burdens suffer from weak pension funding, and those states currently rated A1 or higher have even helped address recent growth in their pension liabilities by adapting increased revenue control, according to the report.
The move to promote disclosure and increased clarity of state debt information also comes at a time when the municipal market is reeling from fears over the possibility of widespread defaults and bankruptcies following comments by Wall Street analyst Meredith Whitney last month on the television show “60 Minutes.”
Her prediction for “hundreds of billions of dollars” in defaults and bankruptcies by 50 to 100 municipalities sparked a barrage of outflows from municipal mutual funds by retail investors that reached record proportion when $4 billion exited in the week ended Jan. 19.
In other credit-related news this week, Standard & Poor’s said it would reevaluate its creditworthiness opinion of states if a bill in Congress allowing municipalities to file for bankruptcy ever becomes a reality.
The rating agency believes that states have a legal obligation to pay debt service — despite their difficult economic conditions — and would not likely opt for bankruptcy filing as an option to address current or future budget gaps.
The rating agency released commentary about its position Wednesday in response to repeated inquiries from municipal market participants regarding the bill.
“If state bankruptcy filings were authorized under the U.S. Bankruptcy Code, we would evaluate the potential impact to creditworthiness of such authorization. We would likely reevaluate our creditworthiness opinion and take ratings actions that we deem appropriate in accordance with the 'overriding factors’ of our state rating methodology,” the agency wrote in the statement.