Moody's Investors Service, dissatisfied with the way states measure what they owe their retirees, released its own numbers 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, such as 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 might 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 Gold called "extraneous." Moody's also said Thursday that its analysts had decided that the states' 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 understand.
Moody's said funded ratios were good for certain things, such as 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 outsized 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, such as school districts. Current government accounting rules, which are now being changed, make it look as if those states must pay the total cost.
By MARY WILLIAMS WALSH
The New York Times