Pensions are posing a bigger burden on U.S. states while overall debt levels remain mostly manageable, Fitch Ratings said in in a report released on Tuesday.

“Unlike bonded debt, state pension burdens continued to rise,” said Fitch senior director Douglas Offerman. “Factors driving this growth include weaker-than-expected asset performance during the most recent reporting period, inadequate contributions by some governments, long-term demographic trends and the continued shift by states toward lower discount rates.”

Fitch said it calculations showed a 6% year-over-year increase in median state long-term liability burdens of 2016 personal income compared to 5.6% in 2015. Fitch attributed the entire increase to defined benefit pension liabilities versus bonded debt. Fitch, however, believes the median state liability burden is low relative to state resources.

But Fitch said when liability burdens are assessed for individual states the situation looks different.
Six states have liability burdens over 20% of personal income, Fitch said with Illinois topping the list. Illinois has a total liability burden that is equal to 28% of personal income. Connecticut is second, followed by Kentucky, New Jersey, Alaska and Massachusetts.

In contrast, 38 states have liability burdens under 10% of personal income, with Nebraska the lowest at 1.4%, Fitch said.

“The disparity in liability burdens is driven mostly by pension obligations,” Fitch said in its report. “Many states with elevated pension burdens provide pensions not only to state retirees but also to local teachers.”

Fitch said that a history of weak contribution practices has resulted in actuaries forecasting that pension assets will be depleted for many states with the highest pension burdens.

“This requires a more conservative calculation of pensions under current accounting rules,” the report said.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.