Ratings Service Moody’s Finds Pension Shortfall

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					 Ratings Service
 Moody’s Finds
Pension Shortfall
 Full Article on NY Times DealBook
Moody’s Investors Service, dissatisfied with the way states measure what they owe their
retirees, released its own numbers on Thursday, showing that the 50 states have, in aggregate,
just 48 cents for every dollar in pensions they have promised.

That is much less than the 74 cents on the dollar that the states now report, suggesting the
states are short by about $980 billion, with many local governments, like school districts,
being on the hook for additional billions that they have not disclosed at all.

The disparity suggests that politically difficult steps taken recently by many states to fix their
pension problems — raising retirement ages, requiring bigger contributions from workers,
lowering benefits for new hires — will prove insufficient, because they were based on
underestimates of the problem.

Moody’s new method reflects a belief, held by many economists, that states and local
governments are severely distorting their pension numbers by failing to take proper account
of market risks. This makes public pensions look cheaper than they are turning out to be,
wreaking havoc with budgets. Moody’s new method does not go as far as these economists
may wish. But it does eliminate some of the distortion by converting the value of future
pensions into current dollars using a high-quality taxable bond rate.

“They have moved clearly in the right direction, and for a reason which is clearly a sound
reason,” said Jeremy Gold, an actuary and economist who has been an outspoken critic of
governmental pension disclosures. “They are drawing a parallel in their own minds between
bond payments and pension payments, and they’re saying that whatever the market tells us
about bond payments, we want to use that to measure pension payments.”
Public pension measures usually incorporate expected stock market returns, which Mr. Gold
called “extraneous.”

Moody’s also said on Thursday that its analysts had decided that the states’ so-called funded
ratio — the dollars in their pension funds compared with dollars promised to retirees — was
not useful for issuing credit ratings, even though the ratios are widely cited and easy to

Moody’s said funded ratios were good for certain things, like determining whether a state
pension system was at risk of running out of money. But for ratings, it said it wanted to
compare each state’s pension promises with its total economic resources, whether the money
was in a pension fund or not.

Measured that way, the state struggling with the most outsize pension burden is Illinois.
Moody’s found that its unfunded pension promises were more than three times the amount
of revenue the state takes in every year through taxes and fees.

By the same measure, Nebraska’s pension plan posed the least credit concern, with a shortfall
of just 7 percent of the state’s annual revenue. That is in large part because the benefits
offered by the state of Nebraska are relatively small.

Surprises emerged when Moody’s measured each state’s ability to pay not by its tax revenue
but by its gross domestic product. In that case, Alaska surged to the top of the list with a
pension shortfall of more than one-fifth of its total output, surpassing even Illinois, which is
widely considered to have America’s biggest pension problems.
Alaska also scored the biggest burden when Moody’s measured economic capacity on the
basis of personal income. But when Moody’s added Puerto Rico to its rankings, it rocketed to
the top of the list, ahead of even Alaska and Illinois. The territory’s pension shortfall was 59
percent of the personal income of its residents, more than eight times the 50-state median of
about 7 percent. Alaska was the runner-up to Puerto Rico, with a pension shortfall 32 percent
of its residents’ personal income, and Illinois came in third at 24 percent.

Puerto Rico’s financial burdens are of great interest to investors because it has an unusual
amount of debt outstanding, much of it in mutual funds. Its rating is one notch above the
junk-bond range, lower than the rating of any state.

Some states that are widely thought to have pension problems, like California, fared better
than might have been expected under Moody’s new rating method. That was because
Moody’s noted that much of what appeared to be their duty to pay pensions was really the
duty of local bodies of government, like school districts. Current government accounting
rules, now being changed, make it look as if those states must pay the total cost.

A version of this article appeared in print on 06/28/2013, on page B1 of the NewYork edition with the headline:
Ratings Service Finds Pension Shortfall.
                     About Moody’s
Moody’s is one of the top 3 credit rating agencies. They provide research, credit ratings, tools
and analysis that contribute to transparent and integrated financial markets.

The top management team includes:

•   Moody’s CEO Raymond McDaniel
•   President Mark Almeida
•   Chief Risk Officer Richard Cantor
•   Senior Vice President Robert Fauber
•   Executive Vice President & General Counsel John Goggins
•   Executive Vice President & Chief Financial Officer Linda Huber
•   President and Chief Operating Officer of Moody’s Investor Services Michael Madelain
•   Senior Vice President & Chief Human Resources Officer Lisa Westlake
•   Senior Vice President of Ratings Delivery and Data Blair Worrall

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