By Barbara Pash
Moody’s Investor Service is adding pension liabilities to the factors it reports publicly in rating total state debt, a new approach one expert called “very significant.”
In a report sent to subscribers two weeks ago, Moody’s — one of the three major rating services — revealed all the numbers used by its bond rating service to make its credit decisions, including its assessment of pension liabilities. That information had not previously been made public, said Sheila Weinberg, founder and CEO of the Institute for Truth in Accounting, a nonprofit and nonpartisan organization that has been critical of under-reporting of state pension debt.
“It is very significant to look at debt in a more holistic approach than just isolating the numbers,” she said of Moody’s new approach. “There is greater disclosure and it provides elected officials and the public with another critical piece of information.”
The new numbers showed that while Maryland was not among the top 10 states with the biggest long-term debt including pensions, it ranked between 13th and 17th among the states with the highest debt. (See rankings box.)
The newly released rankings explain why Moody’s has consistently rated Maryland debt as “high,” while Fitch Ratings has described it as “moderate,” and Standard & Poor’s called it “low,” as reported in a 2009 Maryland Reporter article.
Robert Kurtter, Moody’s Investor Service’s managing director of public finance, said the change was made “for greater transparency and to be consistent with [Moody’s] corporate finance practice.”
Kurtter added that “it provides a better view for analysts and investors about what liabilities a state is facing,” including risk from pension shortfalls.
Both Kurtter and Weinberg said that the reporting change would not affect states’ ratings. After all, Weinberg said, “Moody’s had been using these numbers internally.”
However, the new approach “does change the perception of a state’s debt,” Weinberg said of the report. It also compares states to each other using such measures as personal income, gross domestic product (GDP), per capita and as a percent of revenue.
For example, Weinberg said she was surprised that the state of Hawaii topped Moody’s list of 50 states with the highest combined pension and long-term debt liabilities as a percent of GDP. “You don’t hear Hawaii mentioned a lot,” she said. Maryland ranked 15th in that measure.
In a summary of the report, Moody’s mentioned Maryland favorably as having, along with South Carolina, “strong credit ratings despite relatively high debt and pension burdens, underscoring that these liabilities are only one of many factors that contribute to state ratings.”
The change comes at a time when questions are being raised about the methodology used by rating agencies like Moody’s. The financial industry has been sharply critical of the rating agencies as unfunded pension liabilities have soared, becoming a serious threat to many states’ budgets.
The Maryland State Retirement and Pension Fund’s currently has $36 billion, which leaves $18 billion in unfunded liabilities if it were funded at 100%. The pension fund shortfall has become a major political issue as Gov. Martin O’Malley and the General Assembly look for ways to address the state’s $1.3 billion debt. Pension funding for state employees and teachers uses more than $1.2 billion in the state budget.
Patti Konrad, debt management director of the state treasury office, said the state discloses its pension situation to the rating agencies whenever it issues bonds.
“It’s not a surprise to them in any way,” said Konrad, who recently spoke with a Moody’s analyst asking questions about the pension system and the funding method used by the state.
Moody’s questions Md. debt managers
Last July, as the state sought the coveted Aaa rating before issuing $490 million in general obligation bonds, Konrad said that Moody’s was interested in the commission that was examining pension reform, and whether the governor and state legislature would act on whatever recommendations resulted.
“That was the key,” she said of the triple A rating Moody’s awarded the state, as did Standard & Poor’s and Fitch Ratings.
In its report, Moody’s acknowledged that its comparison of states is “imperfect.” Moody’s takes the states’ information about their pension funds at face value. It does not question the assumptions on which their various methodologies are based or independently verify the validity of their mathematics.
Critics disagree with Moody’s on this point, contending that some states undervalue their pension shortfalls. “There are questions about those pension debt numbers,” Weinberg said.
Even if a state’s numbers are accurate, because states use different methodologies, a misleading picture may emerge.
At T. Rowe Price, spokesperson Heather McDonold said that the mutual fund company “does its own independent credit research” on state’s debt. “We are not entirely reliant on the credit rating agencies, and that includes Moody’s and S&P,” she said.
Kurtter said that the timing of Moody’s new approach had nothing to do with the controversy over the rating agencies.
“For us, it’s less about controversy than about these pressures that are building, [including] weakness in the equity market,” he said. “Unfunded liabilities have grown large and this is contributing to budget pressures on the states.”