By Sean Whaley, Nevada News Bureau: Nevada fares well among the states in a new report that includes unfunded public pension liabilities as part of overall state debt.
This despite Nevada’s long-term unfunded public employee pension liability, which hit $10 billion as of June 30, 2010. Nevada’s public pension plan is 70.5 percent fully funded, down from 72.5 percent in fiscal year 2009.
Moody’s Investors Service announced yesterday it is recalculating states’ debt burdens to reflect pension liabilities.
“Pensions have always had an important place in our analysis of states, but we looked separately at tax-supported bonds and pension funds in our published financial ratios,” said Moody’s analyst Ted Hampton in a news release about the new report. “Presenting combined debt and pension figures offers a more integrated – and timely – view of states’ total obligations.”
Nevada ranks well in the analysis.
The Moody’s report shows that Nevada ranks 40th lowest when the unfunded pension liability is factored into a state’s debt as a share of the gross domestic product at 3.1 percent.
The top three states are Hawaii at 16.2 percent, Mississippi at 15.9 percent and Connecticut at 15.2 percent.
When viewed as state debt per capita, Nevada is again ranked 40th lowest at $1,547.
The top three states in the per capita ranking are Connecticut at $9,366, Hawaii at $7,987 and Massachusetts at 7,872.
Moody’s said that given the level of fiscal stress being felt by most states and the prospects for sluggish economic growth and slow revenue recovery, pension funding pressures will continue to have a negative impact on state credit quality and state ratings. Moody’s also recognizes that, as currently reported, pension liabilities may be understated.
Moody’s presentation of combined debt and pension figures as part of a more integrated view of states’ total obligations follows a period of rapid growth in unfunded pension liabilities.
“Pension underfunding has been driven by weaker-than-expected investment results, previous benefit enhancements, and, in some states, failure to pay the annual required contribution to the pension fund,” Hampton said. “Demographic factors – including the retirement of Baby Boom-generation state employees and beneficiaries’ increasing life expectancy – are also adding to liabilities.”
In Nevada, the Legislature has followed the recommendations of an independent consulting actuary on the contribution rates required for the Public Employees Retirement System, which covers virtually all state and local public sector workers. Contribution rates by the state and local governments and their employees are set to rise again in the coming two fiscal years to maintain the long-term financial health of the plan.
Moody’s said that the evaluation of current and projected pension liabilities is an important area of focus in its rating reviews. For some states, such as Illinois, which is rated A1 and has a negative outlook, large and growing debt and pension burdens have already contributed to rating changes.
Moody’s said states as a group are highly rated – currently A1 or higher – because of their control over revenue and spending that may help address the recent growth in their pension liabilities.
Nevada retained its double-A rating from the nation’s three major credit rating agencies, including Moody’s, in advance of a bond sale in December. “AA” ratings are judged to be of high quality and are subject to very low credit risk. “AAA” is the highest rating possible, with “CC” being the lowest.
Moody’s did revise its intermediate outlook for Nevada to “negative” from “stable” late last year however, which could mean a ratings change in the months ahead.
Moody’s cited a “very large expected budget gap” for the next biennium and uncertainty about how the gap will be eliminated as a reason for the change in outlook. Also mentioned were Nevada’s weak economy and “uncertainty around the recovery of gaming in the state.”
Hampton said many states are beginning to respond to the growing challenge of pension liability by increasing contribution requirements, raising minimum retirement ages, and undertaking other reforms.
The Nevada Legislature implemented some reforms to PERS in the 2009 session, including raising the retirement age from 60 to 62 with 10 years of service for newly hired public employees.
Newly elected GOP Gov. Brian Sandoval wants to undertake a major change to the retirement system, however, switching from a defined benefit plan to a defined contribution plan for future employees. He offered no details of what the change should look like in his State of the State address on Monday, only asking the Legislature to quickly send him a package of reforms.