Some
U.S. states face so much pressure to fund pensions for public
employees that it could hurt their credit ratings, Moody's Investors
Service said on Thursday.
As concerns grow over the
financial health of many states after the 2007-2009 recession and how
they will cut spending to cope, the ratings agency combined pension and
debt data to rank the liabilities of each state.
In
the past, Moody's evaluated credit risks from pensions and debt levels
separately. Lower credit ratings could raise the costs to states of
borrowing money.
Connecticut, Hawaii, Illinois, Kentucky,
Massachusetts, Mississippi, New Jersey and Rhode Island, along with
Puerto Rico, have the largest debt-and-pension loads, Moody's found.
Nebraska and South Dakota have the lowest.
"Large
and growing debt and pension burdens have been, and will continue to
be, contributing factors in rating changes," Moody's said.
Problems
with pensions -- which states have underfunded by at least $700
billion -- include weak returns on investments, not enough money set
aside, impending retirements of "Baby Boomers" born in the late 1940s
through mid-1960s, and Americans living longer, Moody's said.
New
York, Delaware and California are often cited for large debt burdens
but do not have the highest combined long-term liabilities, Moody's
analyst Ted Hampton said in a statement.
"In general, states'
rankings for debt and pension combined parallel their rankings for debt
alone," Hampton said but he added: "not all states with large debt
burdens also suffer from weak pension funding."
IN THE TRILLIONS?
The
$700 billion underfunded figure is a conservative estimate for how
much money states will need to cover the pension promises they have
made to their employees.
But $3 trillion could be nearer the
mark, one study warned last year. States expect too generous a return
on investments made by their pension funds, said the study by Joshua
Rauh of the Kellogg School of Management at Northwestern University.
Regardless of the exact amount, states have to find a way to adequately fund pensions.
"More
and more, it's going to take up a larger share of their ... budgets,"
said Kil Huh, director of research at Pew Center on the States, which
has been closely following the pension issue.
Money
flows from three major sources into pension funds: employee
contributions, the employing governments and investment returns.
"Employee
contributions have gone down and, at the same time, employer
contributions because of the fiscal crisis haven't been there," Huh
said.
Moody's, too, says the problem is getting bigger.
"Unfunded
pension liabilities have grown more rapidly in recent years because of
weaker-than-expected investment results, previous benefit enhancements
and, in some states, failure to pay the full annual required
contribution," the report said.
"Moreover, pension liabilities may be understated because of current governmental accounting standards," it added.
The
Moody's report "will shed more light upon the states which have
eliminated or underfunded their yearly contributions for pension
liabilities simply as a way to manage their finances," said Thomson
Reuters Senior Market Strategist Daniel Berger.
One
dramatic solution to the pension problem would be allowing states to
declare bankruptcy, which some congressional Republicans want. Then,
they could renege on pension promises made to employees.
After
being criticized for missing risks in the housing boom, Moody's is
showing with this report it's "not asleep at the wheel" on the pension
threat, said Richard Larkin, senior vice president and director of
credit analysis at Herbert J Sims & Co. in New York.
But, the
report also showed the liabilities are manageable, he added. For
example, Moody's found Hawaii's pension-and-debt load is equal to 16.2
percent of its gross domestic product, the biggest proportion of all the
states.
Even though the liabilities are in the billions of dollars, "when you compare them to GDP it's still low numbers," Larkin said.
"And
it's still relatively much lower than these problem countries people
keep comparing them to," he said, referring to recent fears that
California or Illinois will soon be plunged into troubles similar to
those Greece or Ireland are facing.
In a separate article, Simone Baribeau of Bloomberg reports, Moody's Says Massachussetts Among States With Highest Debt, Pension Burden:
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