By Len Lazarick
The three national rating agencies have renewed their AAA rating for Maryland’s upcoming $718 million bond issue, but all three continue to be concerned about the state’s pension funding and dependence on federal government spending.
These factors were outweighed by the state’s strong economy, its high income and sound fiscal management. The analysts acknowledged the improvements made by the pension changes made earlier this year.
Maryland has been getting the AAA rating for decades — one of just eight states with a top rating — but State Treasurer Nancy Kopp said retaining it this year is “an extraordinary accomplishment.”
“Considering the uncertainty at the federal level over debt ceilings and deficit reductions, we are pleased the rating analysts recognize Maryland’s strong, stable and prudent financial management,” Kopp said in a statement.
The analysts visited Maryland last month to meet with officials, and earlier this week Kopp told legislators she was concerned the impasse over the federal debt ceiling might force delay of the planned bond issue July 27. Next Friday, $100 million of the bonds go on sale to Maryland residents.
Moody’s Investor Services said it will re-examine the AAA ratings of borrowers like Maryland next week in light of what’s happening on the federal debt limit and Treasury bonds. In its report, Moody’s noted that Maryland’s economy “continues to be proportionately more affected by the activities of the federal government than any other state.”
Standard & Poor’s report said without “a timely resolution” of the federal debt limit, “the risks to the state associated with a decline in federal funding could accelerate.”
In its report, Fitch Ratings said its estimate of the state’s unfunded pension liability was even higher than that of the Maryland retirement system, because it assumed a lower 7% return on investment, rather than Maryland’s 7.75% assumption. Moody’s also noted that Maryland’s pension funding of 63% “is at a lower level than most similarly rated states.”
But it said that should improve based on the increases in employee contributions and reduction in benefits passed by the legislature this year, facts also cited by Standard & Poor’s.
New accounting for pensions
How to calculate pension liabilities is matter of dispute among retirement agencies and accountants. The Government Accounting Standards Board last Friday issued a proposed new standard for public pensions that would force state and local governments to improve how they calculate and report the costs and obligations of their retirement systems.
Michael Golden, a spokesman for the Maryland State Retirement and Pension System, said his agency had not yet determined how the new standard would affect Maryland.
According to the National Conference of State Legislatures, Maryland was one of 25 states that made changes to its pension systems this year, and it was one of 15 states that increased employee contributions, and one of 14 that changed eligibility requirements.