State pensions face larger-than-usual funding gap, Moody’s report says

State pensions face a much larger funding gap than their financial reports typically reveal, according to a new calculation released Thursday by the credit rating firm Moody’s Investors Service.

Moody’s said its calculation shows that states had just 48 cents of each dollar promised to current and future retirees in 2011. Currently, states report that they have 74 cents of each dollar owed to retirees.

The report said 2012 figures, which Moody’s plans to publish later this year, will be worse, largely because of a mix of poor investment returns and falling interest rates, which make pension liabilities look bigger under accounting rules.

Moody’s report adds fuel to the smoldering controversy over the financial burden posed by the retirement plans of most government employees. The issue has led to pitched battles in states such as Wisconsin, Florida and New Jersey, where Republican governors have sought to trim retirement benefits.

Meanwhile, many other states have taken the politically explosive step of trimming pension liabilities by requiring public workers to make higher contributions, work longer before collecting pensions or, in the case of some new employees, make do with smaller benefits.

But the Moody’s report could mean that state and local governments will have to do more to rein in the cost of retirement benefits.

The report is in line with the views of some economists who believe that many states and local governments are understating their pension promises by assuming overly optimistic investment returns. In its report, Moody’s used a corporate bond rate to project the future value of pension fund assets. Many states are using rates that make their pension systems look much healthier than they are, thus allowing governments to contribute less to the plans each year, critics of such practices say.

Moody’s said its methodology is a more accurate way of measuring the financial burden posed by public-employee pensions. It also compared the size of each state’s pension liabilities with what that state could muster in funds.

Moody’s report found that the median funding level of pension liabilities to state revenues for all 50 states in 2011 was 45 percent. But the levels varied widely from state the state. Illinois, where legislators have repeatedly failed to enact sweeping pension reform, had the highest pension liabilities, nearly three and a half times what the state raises in revenues. Nebraska had the pension fund deemed to be in the best shape, with liabilities of just 6.8 percent of revenues.

“The largest accumulated liabilities most often reflect management decisions not to fund contributions at levels meeting actuarial guidelines,” said Timothy Blake, a managing director at Moody’s.

Maryland had pension liabilities totaling 99.5 percent of revenues, the 10th-worst ratio in the nation, according to Moody’s. Virginia ranked 31st, with liabilities that were 35.5 percent of revenues.

Michael A. Fletcher is a national economics correspondent, writing about unemployment, state and municipal debt, the evolving job market and the auto industry.
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