–Updating Story Sent 12:48 ET With Comments From Fitch Ratings Analyst
By Yali N’Diaye
WASHINGTON (MNI) – Rating agencies are seeing intensifying efforts
by U.S. states to rein in their long-term liabilities through pension
reforms, which no doubt is a positive in the states’ credit assessments.
That being said, pressures from other areas are mitigating this
positive element, suggesting little if any upward rating adjustments in
the near term based on pension reforms.
That is not only because costs related to Medicaid or Medicare are
piling up but also because pension reforms are mostly geared towards
future employees, suggesting gradual improvements in pension funding are
unlikely to affect ratings in the short term.
In a report earlier this week, Moody’s analyst Lisa Heller
highlighted “an ongoing trend among states to find flexibilities in
their retirement systems to rein in their long-term liabilities.”
“We are seeing an acceleration in this trend,” she told MNI.
“Most definitely, we’ve been seeing a number of states take action
to either reduce benefits or change contribution practices in order to
— at least over the long term — improve the funding level of their
pension systems,” Fitch analyst Douglas Offerman told MNI. The trend
“has absolutely accelerated,” he said.
Rather than an acceleration, S&P analyst John Sugden told MNI “what
we are seeing is a continuation,” pointing out that efforts started one
or two years ago.
He said probably over 40 states out of 50 “have undertaken some
sort of pension reform.”
Among those that have not taken steps, some are well-funded, which
might explain their decision. “I don’t think all of them have to do it,”
Sugden said. Still, “even some of the well funded states are taking some
measures.”
The most important thing, he said, is that the states “that have
the greater issues with pensions have certainly come forth and addressed
those.”
Going forward, efforts are likely to continue.
“We’ll continue to see states push forward pension reform,” Sugden
said “to really bring the pension issue and the long-term liability
issue into greater control.”
He noted that efforts are mostly aimed at containing costs, which
had been growing at a “fairly rapid pace.”
Now, after the downturn of the market, the great recession, and
given the current environment of slower revenue growth, “states are
trying to address their long-term liabilities.”
States are also adopting a structural approach, Sugden told MNI.
Pension funding is part of the debt-liability assessment by rating
agencies, so pension reforms that result in liability reduction are no
doubt a positive element in the credit assessment.
Sugden noted there are two types of reforms.
Some address future employees, where reform is “incremental and
gradual” with no significant short-term impact.
Some, on the other hand, address current employees and their
benefits, with a more immediate impact on the funding ratios. “But those
are typically facing some sort of litigation,” he said.
In its report earlier this week, Moody’s pointed out that, “in
recent months, courts in Arizona, Florida, and New Hampshire have ruled
that the respective states cannot implement certain benefit changes
affecting current employees, although in each case these initial
decisions are being appealed.”
Heller wrote that “at the same time, courts in Colorado and
Minnesota have ruled that the states may make certain changes affecting
current employees and retirees. New York, on the other hand, recently
enacted legislation reducing pension benefits only for new employees
hired after April 1, 2012.”
“For the most part, efforts are geared toward future employees and
the impact will be more gradual,” S&P’s Sugden said.
While the states’ efforts to address pension funding are certainly
a credit positive for rating agencies, Moody’s spokesman David Jacobson
told MNI that “we still maintain a negative outlook on the states for
2012.”
“While revenues are improving and some states are reforming their
pension plans, states are still facing budget pressure from Medicaid and
employee health care, plus the overall economic recovery continues to be
weak,” Jacobson argued.
He added that “federal downsizing and budget cuts remain a
potential issue that could also impact states.”
Clearly, “the pension situation for many states is a concern,”
Fitch’s Offerman told MNI. “No pension system is unaffected by the
market environment of the last few years,” he stressed.
Fitch has indeed taken action on several states partly because of
their liabilities, such as Illinois, Kentucky or Connecticut, and
long-term liabilities have also been cited in other agencies’ decisions.
That being said, states have “tremendous power to influence the
contribution practices for pension benefits,” he said, and many are now
using it.
And this political will by itself is a positive.
“We absolutely take into account a state’s willingness and ability
to make changes to the pension system in order to address under
funding,” Offerman said.
For now, however, Fitch maintains its stable outlook for U.S.
states, he said, with some concern over the “strength and durability of
the economic environment and their revenue sources.”
Having recently announced the use of a new long-term liability
metric in states’ credit analysis, Fitch said in a March report that
“the ratings of the states with the highest combined metrics, including
Hawaii, Illinois, Connecticut, and Kentucky, have seen credit
deterioration in recent years reflecting in part their liability
burdens.”
Looking at some key states, Fitch’s data show debt and pension
allocation as a percentage of personal income is 8.9% for California,
4.1% for Florida, 25% for Illinois, 22.9% for Connecticut, 18.3% for
Massachusetts, and 6.5% for New York.
** MNI Washington Bureau: 202-371-2121 **
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