Breaking news: PERA woes dent state credit rating

The State of Colorado had its credit rating reduced from “stable” to “negative” because of Colorado PERA’s “long trend of annually contributing less than its actuarially determined contribution (ADC) to its retirement systems,” S&P Global Ratings announced Thursday.

Changing the rating from “stable” to “negative” does not immediately reduce the state’s letter rating from its current “AA” issuer Credit Rating or its “AA-” on “the state’s lease and certificates of participation (COPs) debt outstanding.”

However, analyst Oladunni Ososami cautioned:

“Should the state’s combined pension funded ratios continue to decline during our two-year outlook horizon, with no significant plan in place to improve pension funding, we could lower our state ICR, which we see as a one-in-three possibility. Should the state enact credible measures that will that will sustainably improve funded ratios, we could return our outlook to stable.”

Whether PERA’s proposed changes to its plans, or whether whatever legislative fix emerges from the 2018 session will satisfy S&P remains to be seen.

In case the link above to the S&P news release is inaccessible without registration, here it is in its entirety:

DALLAS (S&P Global Ratings) Nov. 16, 2017–S&P Global Ratings has revised its
outlook to negative from stable on its ‘AA’ issuer credit rating (ICR) on
Colorado, its ‘AA-‘ long-term rating on the state’s lease and certificates of
participation (COPs) debt outstanding, and its ‘A’ long-term rating on the
state’s moral obligation debt outstanding. At the same time, we have assigned
our ‘AA-‘ long-term rating to the state’s $49.7 million lease-purchase
agreement COPs, series 2017A and 2017B. The outlook is negative.

“The negative outlook on all ratings reflects the state’s long trend of
annually contributing less than its actuarially determined contribution (ADC)
to its retirement systems,” said S&P Global Ratings credit analyst Oladunni
Ososami, “as well as decreasing pension funded ratios that have fallen well
below those of similarly rated states.” Should the state’s combined pension
funded ratios continue to decline during our two-year outlook horizon, with no
significant plan in place to improve pension funding, we could lower our state
ICR, which we see as a one-in-three possibility. Should the state enact
credible measures that will that will sustainably improve funded ratios, we
could return our outlook to stable.

The state will use proceeds from the series 2017A COPs to fund a portion of
the costs of constructing, improving and equipping a new Health Education
Outreach Center on Colorado State University’s Fort Collins campus, while
proceeds from the 2017B COPs will fund other improvements on the campus. Both
series will also fund capitalized interest on the series 2017 COPs and pay
costs of issuance.

The negative outlook on the state appropriation-secured debt reflects our
outlook on our ICR on Colorado.

“We expect Colorado’s economic growth to remain strong despite the decline in
the oil and gas industry and state reserves to remain at what we consider good
levels,” added Ms. Ososami. It is our view that given the state’s strong
finances and economic growth, it currently has the capacity to address its
growing liabilities and proactive measures and could prevent future budget
pressures as liabilities increase. However, until it implements changes and
demonstrates a record of fully addressing its long-term pension liabilities
including correcting the annual under funding of the ADC, we are unlikely to
raise the rating.

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