Moody’s Penalizes States with Unfunded Pension Liabilities

Here is a news items that you can file under: “what the heck took them so long?”  According to the New York Times, Moody’s finally recognizes that unfunded pension liabilities are a threat to the financial well-being of states:

Moody’s Investors Service has begun to recalculate the states’ debt burdens in a way that includes unfunded pensions, something states and others have ardently resisted until now.

States do not now show their pension obligations — funded or not — on their audited financial statements. The board that issues accounting rules does not require them to. And while it has been working on possible changes to the pension accounting rules, investors have grown increasingly nervous about municipal bonds.

Moody’s new approach may now turn the tide in favor of more disclosure. The ratings agency said that in the future, it will add states’ unfunded pension obligations together with the value of their bonds, and consider the totals when rating their credit. The new approach will be more comparable to how the agency rates corporate debt and sovereign debt. Moody’s did not indicate whether states’ credit ratings may rise or fall.

However, while this change is an important step forward, Moody’s does not go far enough as the pension burden is significantly higher than official estimates as I’ve pointed out in other blog such as “Public Pensions-A Case Study in Wealth Alchemy,” “When Will Pension Systems Go Broke,” and “Explaining How Pension Assumptions are Bogus.” The NYT article goes on:

In making the change, Moody’s sidestepped a bitter, continuing debate about whether states and cities were accurately measuring their total pension obligations in the first place. In adding together the value of the states’ bonds and their unfunded pensions, Moody’s is using the pension values reported by the states. The shortfalls reported by the states greatly understate the scale of the problem, according to a number of independent researchers.

“Analysts and investors have to work with the information we have and draw their own conclusions about what the information shows,” Mr. Kurtter said.

In a report that is being made available to clients on Thursday, Moody’s acknowledges the controversy, pointing out that governments and corporations use very different methods to measure their total pension obligations. The government method allows public pension funds to credit themselves for the investment income, and the contributions, that they expect to receive in the future. It has come under intense criticism since 2008 because the expected investment returns have not materialized. Some states have not made the required contributions either.

Moody’s noted in its report that it was going to keep using the states’ own numbers, but said that if they were calculated differently, it “would likely lead to higher underfunded liabilities than are currently disclosed.”

So, they’re only partially lifting their heads out of the sand.  See chart below from the NYT on how the debt burden picture changes for select states.

New York Times New Moodys Debt Rankings

Is the Bush Tax Cut Extension Stimulus in Disguise?

Mark Zandi, Chief Economist at Moody’s, thinks that the Bush tax cut extension is stimulus in disguise:

“It’s stimulus in the sense we’re providing some additional temporary tax cuts and some additional temporary spending increases, so I’m not sure what the difference is between what we’re talking about here and what we did back in early ’09,” Zandi said on America’s Election Headquarters Sunday.

I’ve been asking myself the same question the last few days.  The problem I have is that the plan only calls for a two-year extension of the Bush tax cuts.  Yet, one of the major headwinds on the recovery has been the pending expiration of the Bush tax cuts.  Moving the deadline out by 2 years doesn’t remove the uncertainty.  Individuals and businesses still have to wonder if they tax cuts will be extended, yet again, or allowed to expire.  Temporary tax relief is short-term stimulus . . . the economy needed them to be made permanent.

However, another way to look at the extension is that it is really a deferral of a planned tax increase.  The expiration of the Bush tax cuts  was, on the flip side, a trigger for higher taxes.  It still doesn’t help the uncertainty problem, but the absence of a negative is a positive.

So I think Zandi is right and wrong.  He’s right in that not making the Bush tax cuts permanent (along with all the new provisions) in effect reduces the economic impact of the  extension into Obama Stimulus Part Deux–with the same lackluster results.  However, he’s wrong in that no action would have triggered one of the largest tax increases in U.S. history–thus avoiding a certain policy-induced double-dip recession.

In the end, thanks to muddled U.S. policy, the economy will also continue to muddle its way forward.  While we lost an opportunity to reduce the odds of a double-dip recession (by permanently extending the Bush tax cuts); looking on the bright side, we’ve at least removed this option as the cause for a possible double-dip recession.