In a recent Baltimore Sun commentary, Marta Mossburg questions how long Maryland can continue to keep its AAA bond rating. She highlights the State unfunded pension and health care liabilities as items that should be considered by rating agencies.
One criterion that ratings agencies use to calculate a score is outstanding bond debt as a percentage of personal income. In Maryland, it works out to about 3.4 percent. The state caps it at 4 percent — a level which it considers “affordable.”
But the agencies should not be paid to hold states to their own standards. They are supposed to be able to evaluate all risk, including much more expensive long-term obligations like unfunded pension and health care liabilities for state employees and retirees, as well as needed upgrades to transportation networks.
In Maryland, outstanding bond debt is $9.5 billion. Unfunded pension and health care liabilities are about $30 billion, and if those costs were included in the “affordability” ratio, it would mean that long-term debt would equal more than 14 percent. Consider the $40 billion in planned transportation projects that are not funded but can’t be put off forever, and Maryland’s long-term fiscal situation looks even worse.
Richard Ciccarone, a co-founder and past president of the National Federation of Municipal Analysts and managing director of McDonnell Investment Management in Oak Brook, Ill., said the fact that Maryland has been under-funding its pension plan for years is “not a fact one would expect of a state with an AAA rating.” According to his research, the pension funding went from 91 percent in 2004 to 64.2 percent in 2009.