NEW YORK, Aug 22 (Reuters) - Debt ratings agency Moody's has warned that Huntington, Long Island, could lose its top credit rating if the town funnels more money away from public pensions to meet short-term spending needs, a controversial practice that has skyrocketed among New York's cash-strapped municipalities.
The announcement on Wednesday is a warning to around 200 other municipalities in the state that have deferred more than $2 billion in pension payments over the last three years.
"Deferring current operating expenses to (a) future period is inconsistent with our view of strong financial management," Moody's Investors Service said in a statement. "Continued amortization of annual pension payments could result in a downgrade."
Moody's current Aaa rating for Huntington is the highest investment grade, but the negative outlook means the rating could be cut to Aa1, potentially pushing up the town's borrowing costs. The outlook affects $112 million in outstanding debt and a previously unrated $13.4 million of public improvement bonds.
Municipalities pay contributions for their public employees into a $160 billion system that is administered by the state.
Moody's and Huntington did not respond to requests for comment.
Reuters reported earlier this year that public pension system deferrals by New York's municipalities had quadrupled since 2011 and could accelerate under new rules introduced this year that allow municipalities to divert even more pension money.
Public employers deferred $1.1 billion in the fiscal year ended in March 2013, up from $293.2 million in 2011, a near fourfold increase, according to data from the New York state's Comptroller's office.
The number of public employers using deferrals jumped to nearly 200 in the fiscal year just ended from around 50 two years earlier. About 3,000 employers pay into the system.
The Comptroller's office, which signed off on more liberal deferral rules introduced by state Governor Andrew Cuomo for the current fiscal year, declined to comment.
The Moody's report said Huntingdon had deferred about one-third of required contributions last year. The required payments are determined by actuaries who match future pension obligations with current payment needs.
The deferral program, known as amortization, is designed to help municipalities bridge a spike in contribution rates following the financial crisis. Contributions are expected to fall after 2015, following years of strong market performance.
This year the amounts that the state's municipal employers are required to pay by actuarial formulas are 20.5 percent of the annual wage bills for the Employees Retirement System (ERS) and 28.9 percent for the Police and Fire Retirement System (PFRS).
In 2001, the year after the bubble in technology stocks had peaked, the rates were 0.9 percent for the ERS and 1.6 percent for the PFRS.
Critics say deferring payments risks undermining the integrity of public pensions by creating unfunded liabilities in the system while simply pushing the financial burdens faced by municipalities further into the future.