State Keeps its AAA Bond Rating, But Firms Warn of Federal Cuts, Pension Debt

By Len Lazarick,

ANNAPOLIS—The governor and state treasurer cheered Maryland’s retention of its AAA bond ratings released Friday, July 12, and the three New York rating agencies continued their praise of Maryland’s high incomes, diversified economy and strong fiscal management.

But the agencies, which have given their top ratings to Maryland for decades, also sounded what have become routine warnings about the state’s dependence on federal spending in an era of cutbacks and sequestration. They continued to worry about the state’s high pension liabilities, particularly compared to the other eight states that also get AAA ratings.

The rating firms balance that by noting state officials are keeping a close eye on federal reductions, and pension reforms are projected to restore funding for the retirement system over the next decade.

Low interest and no direct sale to public

The state paid the firms to do the ratings in advance of issuing $475 million in state bonds July 24. Treasurer Nancy Kopp said the triple AAA ratings allow the state “to continue to save millions of taxpayer dollars resulting from the lower interest rates.”

For the first time in several years, members of the public will not able to buy Maryland state bonds directly since the low interest rates they earn has “reduced public interest for this type of investment in recent bond sales,” Kopp said in a statement.

The rating agencies praised the governor and legislature for reducing the structural deficit, keeping a close eye on revenues and maintaining $1 billion in reserves. Gov. Martin O’Malley took credit for these measures but also touted “record budget cuts,” even though overall state spending has grown every year since he took office in 2007 and is now $8 billion higher.

O’Malley did accurately say he had “constrained budget growth” and “made government smaller.” His budgets have reduced mandated spending increases in many programs, and reduced the number of executive branch employees. The number of employees at state colleges and universities not directly under his control has gone up by several thousand.

Different views on debt, outlook and pensions

The report by Moody’s Investor services continues to take a dimmer view than the other two, citing the state’s “above average debt burden and large unfunded pension liabilities relative to the size of its economy.” It also maintained its “negative outlook” based on the state’s linkages to “the weakened profile of the US government.”

“Based on the state’s fiscal 2011 pension data, we have calculated that its adjusted net pension liability was 99% of revenues,” double the median liability of the other states, Moody’s said.

Both Moody’s and the Fitch Ratings report also criticize the 7.75% expected rate of return on its investment portfolio, saying the rate doesn’t reflect market conditions.

“Under Fitch’s more conservative discount rate assumption, the employees and teachers plans would be funded at 57.7% and 60.7% respectively,” not the 62.5% and 65.8% Maryland reports. That is the percentage of money Maryland has on hand to pay out pensions over the next 25 years, currently $19 billion less than full funding.

Last month, the state pension board voted to reduce the estimated rate of return to 7.55% over the next five years.

Both Fitch and the Standard & Poor’s Ratings Services report consider Maryland $10.7 billion in bond debt “moderate” and its bond rating as “stable.”

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