Moody’s Investor Service announced that they will begin factoring unfunded public pension obligations into calculations used to determine state credit ratings. This move was recently pointed out by the New York Times in an article that highlights the nation’s growing recognition of the threat posed by massive unfunded obligations.

The numbers are staggering. American Enterprise Institute and Northwestern University have estimated that states unfunded public-pension liabilities is $3 and $5 trillion, respectively.

Unfortunately, the board that writes the rules for state financial reporting does not require the inclusion of public pension obligations, funded or unfunded, in state financial documents. This grossly flawed accounting system allows state governments to hide the true costs of the staggering benefits provided government workers. It permits lawmakers and bureaucrats alike to shy away from the danger posed to state budgets by out of control public pension obligations.

Moody’s new calculation, the article notes, will “add states’ unfunded pension obligations together with the value of their bonds, and consider the totals when rating their credit.” This new method “will be more comparable to how the agency rates corporate debt and sovereign debt.”

Moody’s initial numbers have revealed which states face the largest problems once unfunded public pension liabilities are accounted for:

• Connecticut, Hawaii, Illinois, Kentucky, Massachusetts, Mississippi, New Jersey and Rhode Island all face the highest levels of indebtedness.
• California and New York, states with the most trouble reigning in their budgets and some of the largest obligations, fare a bit better in the ratings as they have contributed to their pension plans more frequently.

This does not, however, diminish the threat that these massive obligations pose to state budgets. The article quoted Robert Kurtter, managing director for public finance at Moody’s who pointed out that these obligations are “part of the ongoing budget stress.”

This decision by Moody’s is a welcome one, and will hopefully lead to more states tackling their budget and pension woes once and for all. Perhaps other ratings agencies will follow Moody’s lead and allow investors to see what lies beneath the flawed accounting and reporting of state financial documents. And perhaps some day in the near future, the rules will change, and states will end the practice of hiding their actual financial woes from the voting public on their own.