May 29 (Reuters) - 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, Moody's said.
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 state.
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 fiscal 2016.
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 counties.
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 systems.
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.