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State Debt Burdens Are Improving, But Pension Situation Only Getting Worse

Most signs are point to economic recovery, and now Moody’s is forecasting that state debt burdens are set to decline this year, which is another good sign that things are moving in the right direction. However, there’s still one major expense some state and city governments are struggling to pay. While the improvements in state debt burdens are a positive for government pension, the overall pension situation is straining budgets across the country.

state debt burdens
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State debt burdens on the decline: Moody’s

Moody’s Investors Service said in a note recently that data for this year indicates that total net tax-supported debt will likely continue to grow slowly, making this year the fifth year in a row in which growth has been under 2%. The firm said total net tax-supported debt increased 1.2% overall, with half of U.S. states recording increases. Meanwhile, debt ratios also continued to improve, building upon the improvements already recorded in some states in recent years.

Some state and city governments have turned to pension obligation bonds to pay their unfunded liabilities in their pension programs, and Moody’s lists these bonds as a part of net tax-supported debt. However, the Government Finance Officers Association advises against issuing these bonds at all because they carry significant risks, both for the investor buying them and for the government issuing them.

To deal with the staggering and steady increase in unfunded pension liabilities, many states are now turning to pension reforms involving a switch from the traditional defined benefit plan to hybrid plans instead.

Public pension crisis expected to only get worse

The state pension crisis has quickly become a sticking point in some parts of the country, with teachers and other government workers rallying to protect their future. News footage of a rally in Kentucky captured a sign that aptly illustrates state workers’ frustrations with the public pension crisis. It read, “You stole from our pensions and want us to pay it back!?! Shame on you!”

Unfortunately, even though state governments may be in better shape based on the Moody’s data, that improved position may not translate to solutions for the pension crisis. Eric Hananel, a principal at UHY Advisors NY, told ValueWalk in an email that while improving state debt burdens will help states with their pension costs, the “overall climate” for state pensions is negative.

“The lessening of the debt burden will be positive to pensions, but the climate is not a positive one,” he said. “Due to an aging population, the current situation of people living longer is adding pressure. While the market was adversely impacted, the state pension plans became insolvent in return. While the market recovered, there is still the connotation that pensions are a burden on the state. And while they see their debt burdens fall, they will be looking to balance their budgets and provide additional services, but will still put pressure on the pension system.”