May 29 A move in Maryland to shrink a large
budget gap by shifting millions of dollars in pension costs to
counties will help the state's credit quality, but could hurt
local governments' financial health, Moody's Investors Service
said on Tuesday.
"The measure is credit positive for the state," the agency
said in a report, but added that "the change is credit negative
for affected local governments, which will certainly face a
material increase in expenditures despite revenue measures
intended to offset some of those expenses."
The recently passed legislation will save the top-rated
state a net $109 million in fiscal 2013, which begins July 1.
The net savings will climb to $154 million in fiscal 2016.
"The savings will be a financial reprieve for the state,
which compared with its Aaa-rated peers has a high ratio of
unfunded pension liabilities" to gross domestic product,
One measure of pension system soundness is the extent to
which a system can fund its liabilities - primarily future
benefits. Comparing the unfunded liabilities to GDP gives
Moody's a gauge of how much of a burden pensions present to the
Income tax increases, targeted spending cuts and increased
state aid in the new budget will benefit local governments,
according to Moody's, but those forms of assistance "are apt to
be less stable than the local governments' added costs."
County governments serve as the financial nucleii of
Maryland's local finance - accounting for more than 90 percent
of total local government expenditures. The state typically puts
roughly half its revenue collections toward local aid.
The pension shift will affect all 23 counties as well as the
city of Baltimore, transferring $136.6 million in costs in
fiscal 2013, Moody's found. That will grow to $254.8 million by
The offsets the state included in its budget, such as
restoring local police aid and creating a teachers' retirement
grant, will not entirely cover the new spending. They will total
$131.5 million in fiscal 2013 and $187.8 million in fiscal 2016.
All states except Vermont have constitutional requirements
to end their fiscal years with balanced budgets. During the
steep revenue collapse of the Great Recession, states cut
spending and raised taxes, or turned to the federal government
for help. But as those solutions have run dry over the last year
and a half, many states have slashed the funds they send to
local governments or have passed on costs to cities and
Out of all the states' budget problems, none loom as large
as unfunded pension liabilities. Last year, the Pew Center on
the States said states were short at least $660 billion to pay
future benefits. They are also in need of billions more to pay
"other post-employment benefits" such as retiree healthcare.
Many local governments participate in their states' retirement
Maryland called a special legislative session two weeks ago
to pass an operating budget that will wipe out a deficit of $500
million, partly by bringing in about $247.3 million in extra
revenue. But the legislature only closed about half of the
state's total structural gap, about $1.1 billion.