March 28 (Bloomberg) -- Illinois joins Connecticut and Hawaii among U.S. states with the largest debt burdens relative to residents’ personal income, when pension obligations are added, according to new measurements from Fitch Ratings.
The figures “provide a more complete comparative indicator of long-term burdens” by combining each state’s net tax-supported debt with unfunded pension obligations, according to a Fitch report released today. The median value for all states measured is 6.9 percent of personal income, or more than double the 3.1 percent rate for levy-backed debt.
“Fourteen of the 43 states rated by Fitch have a combined liability greater than 10 percent,” Douglas Offerman and other Fitch analysts in New York said in the study. “States with the highest combined metrics, including Hawaii, Illinois, Connecticut, and Kentucky, have seen credit deterioration in recent years reflecting in part their liability burdens.”
The Fitch analysis pushes California, ranked ninth-highest with a tax-supported debt ratio of 5.8 percent of personal income, to 15th at 8.9 percent with pension obligations. The Golden State’s general-obligation bonds are rated A- by Standard & Poor’s and Fitch, seventh-highest and the lowest among rated state debt. Illinois, which Fitch scores one step higher at A, jumps to second place at 25 percent from eighth, at 6.2 percent.
Rankings Little Changed
Connecticut and Hawaii both fund local school capital and teacher pensions, boosting their obligations, the analysts said. Hawaii’s combined ratio is about 26 percent of personal income, the highest value among rated states, compared with 9.2 percent for tax-supported debt, second highest. Connecticut ranked third at almost 23 percent, followed by Kentucky at about 22 percent.
Massachusetts, which tops debt rankings at about 10 percent before pensions are added, falls to a sixth-highest 18 percent. Ranked without retirement obligations, Connecticut is second at 9.3 percent of income, followed by Hawaii at 9.2 percent.
Tennessee has the lowest combined amount, at 2 percent of personal income, followed by Iowa, 2.2 percent, Idaho, 2.5 percent, and South Dakota, 2.6 percent, according to the report. The four were among the 10 with the smallest tax-supported debt.
In assessing state pension obligations, Fitch analysts assumed a 7 percent rate of return on invested assets, rather than the 8 percent average used by most major statewide plans, according to the report. That produced larger retirement obligations for states except Indiana and Virginia.
The company won’t use the new measurements to evaluate local government tax-supported debt because of insufficient data, the analysts said in the report. The new figures also aren’t expected to lead to state rating changes, they said.
Once state and local governments implement new pension accounting standards from the Governmental Accounting Standards Board later this year, Fitch analysts plan to revisit their measurements. They called today’s study an “interim” analysis.
“Debt and pensions are fundamentally different types of obligations, and the combined metric is inherently more variable,” the analysts said in the report.
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