Moody’s Lowers State’s Outlook
Wednesday, June 01, 2011
Moody’s Investors Service has revised the credit outlook for Rhode Island from stable to negative, citing the rising unfunded pension liability and the state’s inability to balance its budget without one-time fixes.
The state’s credit rating remained at Aa2.
“The negative outlook reflects the potential impact of rapidly escalating pension costs on the state's ability to increase its liquidity margins, diminish its reliance on one-time measures to balance its budget and reduce its debt burden,” Moody’s stated in a news release.
“The state's pension costs are set to double in two years by an amount that roughly offsets its budget reserve account, raising the likelihood that it will continue to face significant budgetary pressures and fail to achieve the fiscal breathing room needed to sustain a financial position commensurate with other Aa2-rated states.”
Key factor: pension fund
The Moody report highlighted the problems in the state pension fund, which has gone from an 84 percent funded ratio in 1999 to 61 percent in fiscal year 2009, even though the state had been making all of its annual required payments.
“Like other states, poor investment returns over the past decade and pension enrichments granted during flush times contributed to the persistent funding shortfall,” Moody’s said. “Several rounds of pension reforms, which included changes in accrual rates, retirement age, final average salary and cost of living adjustments, failed to result in significantly reduced liability.”
Moody’s noted that since General Treasurer Gina Raimondo took office, the state retirement board has adopted new assumptions about the rate of return, causing estimates of the pension liability to rise. As a result, the state retirement system is now 48 percent funded. Plus, between fiscal years 2010 and 2013, the annual cost of the system to the state budget will double.
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