Thursday, January 27th, 2011 | Posted by Greg Wiles |  Print This Article

Hawaii One of Top States in Debt, Pension Obligations, Moody's Says

BY GREG WILES

Hawaii is one of the top four states in the nation when it comes to debt and pension burden, according to a new report from Moody’s Investors Service.

The report by Moody’s, a credit ratings agency relied upon by investors buying municipal bonds, could mean higher costs for the state as it issues bonds to pay for capital improvement projects because investors typically seek higher interest rates if they perceive more risk is involved.

The report comes as more discussion takes place in public accounting circles about the cost of future retirement benefits that are piling up for states and municipal governments. Moody’s said it was issuing its report to provide a clearer view of how tax-supported debt and pensions factor into the evaluation of states' total current liabilities.

"Presenting combined debt and pension figures offers a more integrated -- and timely -- view of states' total obligations,” said Moody’s analyst Ted Hampton.

Moody’s found Connecticut, Hawaii, Massachusetts, and Illinois had the highest debt and pension funding needs.

"In general, states' rankings for debt and pension combined parallel their rankings for debt alone," says Hampton.

It also said that Hawaii, Massachusetts, and Connecticut -- the three states with the largest ratios of bonded debt to personal income -- are also among states with the largest combined debt and pension obligations relative to their economies and revenues.

Long-Term Debt, Pension Liabilities as Percentage of Income

1. Hawaii                                            27.7%

2. Mississippi                                     22.8%

3. Connecticut                                    22.3%

4. New Mexico                                    21.9%

5. Alaska                                            21.6%

Long-Term Debt, Pension Liabilities as Percentage of State GDP

1. Hawaii                                            16.2%

2. Mississippi                                     15.9%

3. Connecticut                                     15.2%

4. West Virginia                                   14.5%

5. Massachusetts                                 14.2%

Source: Moody's Investors Service

Moody's said it’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.

Earlier this week The Institute for Truth in Accounting, an Illinois-based group that advocates for fuller disclosure in private- and public-sector accounting, claimed Hawaii isn’t meeting its balanced budget requirement because it hasn’t funded $12.8 billion of pension and healthcare benefits owed to state workers as they retire.

The amount is equivalent to $39,600 per taxpayer, or third-worst of the 29 states it’s analyzed so far, the Institute said.  The amounts accrue as public workers earn pension and healthcare benefits to be paid when they retire.

Gov. Neil Abercrombie highlighted the problem in his State of the State Address on Monday, listing legislation modifying the state’s pension fund as one of his top legislative priorities. Abercrombie said the bill will modernize the terms of the Hawaii Employees’ Retirement System to reflect the economic and social realities of today and be sustained into the future.

“Absent action in this regard, the retirement system itself is in jeopardy,” Abercrombie said in the speech.

Moody's said Hawaii has a combination of very high debt and has struggled to make payments into the pension fund in recent years. Moody's rates Hawaii's debt Aa1, denoting high quality with low credit risk. But it does maintain a negative outlook on the rating, meaning the rating may be subject to downgrade.

"Most of these states, however, have offsetting credit strengths that account for their high ratings, underscoring that these liabilities are only one of many factors that contribute to state credit ratings," Moody's report noted.

Long-Term Debt, Pension Liabilities Per Capita

1. Connecticut                  9,366

2. Hawaii                          7,987

3. Massachusetts             7,872

4. New Jersey                   7,198

5. Illinois                           6,692

Source: Moody's Investors Service

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," said Hampton in a press statement released by Moody’s.

"Demographic factors -- including the retirement of Baby Boom-generation state employees and beneficiaries' increasing life expectancy -- are also adding to liabilities."

Moody's said 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.

"Many states are beginning to respond to this growing challenge by increasing contribution requirements, rising minimum retirement ages, and undertaking other reforms," Hampton said.

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Author: Greg Wiles

Greg Wiles is a long-time business journalist who currently works for Hawaii Reporter. His previous experience includes the Honolulu Advertiser and Bloomberg News.

Greg Wiles has written 69 articles for us.