Rating agencies keeping a close eye on state’s pensions
by Ted Carter
Published: November 30,2012
Mississippi state government ended fiscal 2012 with the same solid credit ratings with which it started the year. Whether the Magnolia State maintains its strong credit in the years to come could hinge on the effectiveness of measures to fund the Public Employees’ Retirement System of Mississippi, or PERS.
The pension funding picture is expected to get bleaker before it brightens, PERS concedes.
The consequences could be reflected in future credit ratings from Moody’s Investors Services, Fitch Ratings and Standard & Poor’s. They all recently awarded the state double “A” ratings or higher. Each, however, noted concern over pension funding.
The rating agencies expressed that concern when the PERS trust had a funding ratio of 62 percent. The ratio has since dropped to 58 percent, a circumstance that could draw increased notice in the next ratings reports.
And beyond that, PERS officials concede they expect a further decline in the pension funding ratio as they factor in recession-driven asset losses from 2009.
State Treasurer Lynn Fitch, a member of the PERS trust board, said she thinks the state can head off trouble with the rating agencies. “Going forward, we feel that we will be able to present a viable plan to the rating agencies to address the issue and bring the funding ratio back to 80 percent by 2040,” Fitch said in an email.
On the advice of actuarial consultants, the PERS board agreed last month to a 15.75 percent fixed rate for employer contributions to the defined benefits plan. The consultants say the rate applied to covered payroll should put PERS on track for an 80 percent funded ratio by 2042.
Fitch, in awarding Mississippi a “AA+” rating for fiscal 2012 and “stable” outlook, noted “pension funding continues to decline, although the state has consistently funded its required annual contributions.”
Despite efforts to fund pension contributions, Mississippi’s unfunded pension liabilities, measured as a percent of personal income, are among the highest of the states, the Fitch report said.
“On a combined basis, the burden of net tax-supported debt and adjusted unfunded pension obligations that are attributable to the state equals 18.6 percent of 2010 personal income, well above the 6.6 percent median for U.S. states rated by Fitch, and amongst the weakest of the states,” the Fitch report said.
Nonetheless, Fitch said, “The demands of debt and pensions on the state’s operating budget continue to be manageable.”
In maintaining Mississippi’s AA rating, Standard & Poor’s noted the state’s financial strengths are offset by its moderately high per capita debt burden and below-average funding of state pension plans.”
S&P said it expects the state will keep its “Stable” outlook for the two-year horizon of the new rating, but only if it continues to address “its structural challenges, such as its underfunded pension systems, and make expenditure cuts as needed to ensure balanced operations.”
Meanwhile, Moody’s assigned an Aa2 rating to Mississippi’s $490 million of general obligation bonds in October and put a “Stable” outlook on the $4.1 billion of general obligation debt outstanding.
But like S&P and Fitch, Moody’s Investors Services is uneasy about the state’s share of unfunded pension liabilities. That share, said Moody’s, came to an estimated $9.35 billion as of the June 30, 2011 valuation.
“The relatively large pension liability poses a risk to future financial flexibility,” Moody’s warned.
Moody’s said it considers unfunded pension liabilities as debt-like obligations that can create a significant burden on government operating budgets.
David Jacobson, spokesman for Moody’s, said Mississippi has “above average levels” of pension liabilities compared to its peers.
Mississippi, however, is hardly alone among the states in that regard, Jacobson said.
“Illinois is currently our lowest rated state,” he said, putting Illinois “three notches lower than Mississippi based mostly on unfunded pension obligations.
Pennsylvania and Connecticut are also struggling with pension funding and have had their overall credit ratings lowered as a result, Jacobson said.
“We have made ratings changes… that have been driven by pension liabilities.”
Going forward, Moody’s may further increase the weight it gives pension funding in setting its overall ratings, he added. “They could soon loom larger.”
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