Fitch: Downgrades Loom for U.S. Cities and States

02-17-2011 • EconomicPolicyJournal.com

In Miami, Florida, a quarter of the city’s operating budget pays for pensions. Among states, Illinois stands out for setting aside 12 per cent of its budget for its chronically underfunded pension. In valuing pension liabilities in its credit analysis of states and local governments, the rating agency will now assume a return on assets of 7 per cent, lower than the average return of 8 per cent used by most pension plans. That translates to an increase in the average plan liability of 11 per cent. Using the 7 per cent rate does not shift any plans from being adequately funded, which Fitch considers to be assets equal to 70 per cent of liabilities, to “weak”, or under 60 per cent. However, plans in Montana, Hawaii, Vermont and New Jersey are among those whose funding ratios fall under 60 per cent using Fitch’s assumptions. The Illinois State Employees Retirement System is the weakest at 37 per cent, compared with 44 per cent using its reported 8.5 per cent assumed rate of return. A hypothetical 6 per cent assumption, however, would drag plans in Nevada, Massachusetts and Minnesota from adequately funded to weak ratios.