Moody’s Adds Pension Debt to Calculation of State Credit Rating

January 27, 2011 ( - Moody’s Investors Service has begun to recalculate the states’ debt burdens in a way that includes unfunded pensions.

The ratings agency said that in the future, it will add states’ unfunded pension obligations together with the value of their bonds, and consider the totals when rating their credit, according to the New York Times. The new approach will be more comparable to how the agency rates corporate debt and sovereign debt.  

The news report said in the past, Moody’s looked at a state’s level of bonded debt alone when assessing its creditworthiness. Pensions were considered “soft debt” and were considered separately from the bonds, using a different method.   

“A more standard analysis would view both of these as liabilities that need to be paid and put stress on your operating budgets,” said Robert Kurtter, managing director for public finance at Moody’s, according to the Times.   

In adding together the value of the states’ bonds and their unfunded pensions, Moody’s is using the pension values reported by the states, but a number of independent researchers say the shortfalls reported by the states greatly understate the scale of the problem. In a report that is being made available to clients, Moody’s acknowledges the controversy, pointing out that governments and corporations use very different methods to measure their total pension obligations. It noted that it is going to keep using the states’ own numbers, but said that if they were calculated differently, it “would likely lead to higher underfunded liabilities than are currently disclosed.”   

The Times reports that under its new method, Moody’s found that the states with the biggest total indebtedness included Connecticut, Hawaii, Illinois, Kentucky, Massachusetts, Mississippi, New Jersey and Rhode Island. Puerto Rico also ranked high on the scale. However, the ratings agency did not suggest that any state is in such serious trouble that it is about to default on its bonds.  

Last month, Fitch Ratings said the analysis of long-term obligations, including pensions, is an important part of its rating review for state and local government credits, and it has downgraded a number of credits due in part to pension funding issues (see Fitch Considers Pension Funding in Government Credit Ratings).