Adjusted net pension liabilities for individual states ranged from 6.8% to 241% of governmental revenues in fiscal 2011. Moody’s preliminary analysis of fiscal 2012 data indicates increased adjusted pension liabilities as investment performance flattened and broadly similar variations in pension burdens. Investment performance and interest rate trends in fiscal 2013 should at least partly offset the growth of ANPL in 2012.
Moody’s 2011 state pension database includes 104 pension plans sponsored in whole or in part by the 50 states and Puerto Rico, covering the largest multiple-employer cost-sharing, multiple-employer agent, and single-employer plans.According to the report, states with the lowest pension burden are Nebraska, Wisconsin, and Idaho at 6.8%, 14.4%, and 14.8% of governmental revenues, respectively. Among the states with the highest pension burden are Illinois, Connecticut, and Kentucky, at 241%, 190%, and 141%, respectively. The portfolio median for this metric is 45.1%.The median state pension liability as a percent of personal income was 7.1%, more than twice the 2.8% median value of state net tax-supported debt to personal income, although the variation across states is wider for pensions than for debt.
The analysis found large pension burdens are not associated with the size of a state’s economy or budget. The states that have the largest relative pension liabilities have at least one thing in common: a history of contributing less to their pension plans than the actuarially required contributions (ARC). In an effort to reduce current expenditures, states that underfund simply increase the portion of their liability that must be amortized, resulting in ever-greater ARCs that become even more difficult to meet. For this reason, funding history is an important credit factor.
For some states, such as Louisiana and Maryland, the shortfall in their contributions is a result of statutory requirements or formulas that have failed to keep up with the pace of growing liabilities and ARCs. However, several states have expanded the gap between an actuarially sound contribution and their actual contributions by taking “pension holidays” or other actions to achieve budget relief. States that have done so are generally rated at less than the average state rating of Aa1. Six of the states in the “top 10” pension burden list—Illinois, Connecticut, Kentucky, New Jersey, Hawaii and Pennsylvania—have been downgraded over the last three years, largely because of the management and growing size of their pension liabilities.In April, Moody's announced its final approach to the way it will analyze and adjust pension liabilities as part of its credit analysis of state and local governments (see “Moody’s Announces Approach to Government Pensions”).