Some U.S. states face so much pressure to fund pensions for public employees that it could hurt their credit ratings, Moody's Investors Service said on Thursday.
As concerns grow over the financial health of many states after the 2007-2009 recession and how they will cut spending to cope, the ratings agency said its report combined pension and debt data to rank the liabilities of each state.
Connecticut, Hawaii, Illinois, Kentucky, Massachusetts, Mississippi, New Jersey and Rhode Island, along with Puerto Rico, have the largest debt-and-pension loads, Moody's found.
Nebraska and South Dakota have the lowest.
"Large and growing debt and pension burdens have been, and will continue to be, contributing factors in rating changes," Moody's said.
Lower credit ratings could raise the costs to states of borrowing money. In the past, Moody's evaluated credit risks from pensions separately from those posed by debt levels.
Issues with pensions — which states have underfunded by at least $700 billion — include weak returns on investments, not enough money being set aside, the impending retirement of "baby boomers" born in the late 1940s through the 1960s and Americans living longer, Moody's said.
New York, Delaware and California are often cited for large debt burdens but do not have the highest combined long-term liabilities, Moody's analyst Ted Hampton said in a statement.
"In general, states' rankings for debt and pension combined parallel their rankings for debt alone," Hampton said but added that "not all states with large debt burdens also suffer from weak pension funding."
The $700 billion figure is a conservative estimate for how much money states will need to cover the pension promises they have made to their employees.
But $3 trillion could be nearer the mark, one study warned last year. States expect too generous a return on investments made by pension funds, said the study by Joshua Rauh of the Kellogg School of Management at Northwestern University.
Moody's also raised questions about the health of pension funds.
"Unfunded pension liabilities have grown more rapidly in recent years because of weaker-than-expected investment results, previous benefit enhancements and, in some states, failure to pay the full annual required contribution," the report said.
"Moreover, pension liabilities may be understated because of current governmental accounting standards."
Some Republicans in the U.S. Senate have embraced the idea of letting states declare bankruptcy to allow them to deal with their financial woes and renegotiate contracts with public employee unions.
Many analysts and state governors do not see bankruptcy as the solution to budget problems, fearing the option would drive up interest rates and make borrowing more expensive.
While Republicans are divided on the idea, which has little chance of clearing Congress, even talk of bankruptcy has caused unease in the $2.8 trillion municipal bond market.
© 2017 Thomson/Reuters. All rights reserved.