Moody’s blues: New analyses raise troubling spectre for Oklahoma pensions

By Patrick B. McGuigan

Published 02-Mar-2011

Oklahoma’s excellent bond rating could be at risk, according to several sources, including a new analysis in the March 2011 edition of Perspective, monthly publication of the Oklahoma Council of Public Affairs.

J. Scott Moody and Wendy P. Warcholik, in their essay “Changes in Moody’s Credit Scores Could Cost Oklahoma Dearly” detail a cluster of changes in the way Moody’s Investors Service evaluates state debt and pension liabilities.

The pair wrote:

“Moody’s Investors Service recently made a major change in how it will calculate a state’s credit rating. Oklahoma policymakers should take notice.

“In a nutshell, Moody’s will now include a state’s unfunded pension liability, along with the traditional net tax-supported debt, when determining a state’s credit rating. This change is particularly significant for Oklahoma.

“Under the traditional net tax-supported debt (NTSD), mostly general obligation bonds, Oklahoma’s debt burden is quite low.”

Their summary continued, “Oklahoma’s NTSD as a percent of Gross Domestic Product (GDP) in 2009 was 1.4 percent, which ranks on par with neighboring states and significantly below the national average of 3.3 percent. However, Moody’s methodological change now brings Oklahoma’s mammoth unfunded pension liability into the picture. … Oklahoma’s unfunded pension liability as a percent of GDP in 2009 was 8.6 percent. This was more than three times higher than in neighboring states (2.6 percent), and more than twice as high as the national average (3.3 percent).

“Unfortunately, when the NTSD and unfunded pension liability are combined, the advantage that Oklahoma held under the traditional NTSD metric not only vanishes but now becomes a significant liability. …  Oklahoma’s combined debt as a percent of GDP is 9.9 percent. This was more than twice as high as in neighboring states (4 percent), and significantly higher than the U.S. average (6.5 percent).

“Therefore, as a result of Moody’s methodological change, Oklahoma can expect to see a decline in its credit score relative to neighboring states and the U.S. as a whole. This means Oklahoma will have to pay higher interest rates for all state debts, which ultimately means higher interest payments. In the end, taxpayers will have to contend with reduced services or higher taxes due to the crowding-out created by higher interest costs.

“But wait, there’s more. Moody’s takes the official pension costs at face value when, in fact, there is an ongoing debate as to whether or not the ‘official’ estimates dramatically understate the pension burden.”

Oklahoma’s unfunded pension liability is as much as 14.5 percent of gross domestic product. That is three times higher than in neighboring states, and twice as high as the national average, the pair reported.

Independent reading of the January 26, 2011 report from Moody’s Investors Service will not likely provide comfort to Sooner State fiscal analysts. The report read:

“Our credit analysis has long focused on states’ net tax-supported debt, while also looking separately at pension funded ratios to assess the relative risk implied in states’ long-term liabilities. As part of our ongoing efforts to provide increased transparency, and in view of prospects for sluggish economic growth and slow revenue recovery among U.S. states, this report provides figures that combine unfunded pension liabilities with outstanding bonds when evaluating the leverage position of state governments.”

The analysis shifted Oklahoma into the weakest 15 states in three of four important “metrics,” and put Oklahoma at 21st place in another.

In terms of personal income, the analysis places Oklahoma at 14th (17.1% of personal income) among the 50 states. This compared to the worst state in the study, Hawaii, at 27.7% of personal income. In Gross Domestic Product, the state was twelfth worst among the states, with the combined pension and long-term debt at 10.4%, compared to Hawaii’s 16.2%.

As for per capita, Oklahoma was 15th worst, at 4,142, compared to Connecticut’s 9,366, the worst in the analysis. As a percentage of revenue, the combined burden put Oklahoma at 21st (160.8%) worst, compared to the worst state of all, Oregon (316.8%).

The Moody’s analysis seems to echo that of the Institute for Truth in Accounting in that the latter group ranked Hawaii, Connecticut and new Jersey as the worst states in per-taxpayer projected debt. Oklahoma was worse than average in that assessment.

Oklahoma state Treasurer Ken Miller, responding to the Moody’s analysis at the recent meeting of the Oklahoma state Pension Committee, characterized the state’s pensions as at “crisis level.”