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STEVE CHIOTAKIS: It’s well-documented, the financial troubles states are having. A big part of those troubles has to do with what states are paying public workers in pension benefits. Now the ratings agency Fitch is changing its formula in determining whether states are able to pay out those pensions as a part of their cash-strapped coffers. Which could then cause a downgrade in some state or local ratings.
Dick Larkin is director of credit analysis at Herbert J. Sims & Co. He’s with us from New Jersey. Good morning.
DICK LARKIN: Good morning Steve.
CHIOTAKIS: How are we looking right now as far as the pension picture in this country?
LARKIN: Well, the pension funds are obviously at some of their lowest levels they’ve ever been. The good thing is they’re about the same as they were back in 1994, but it’s obviously a challenge that has to be addressed by cities and states. But it’s not one that’s going to cause immediate insolvency. It’s not going to run out of money in the next year or two — that’s for sure.
CHIOTAKIS: So what does this actually mean then in terms of how Fitch is going to look at these pension plans?
LARKIN: What it means is Fitch has found a reason to downgrade some state and local governments because of unfunded pension liabilities. They’ve always had reasons before. They’ve always looked at pension funding as a major facet in thier bond rating assessments. But by changing one of their investment assumptions, it’ll single out some state and local governments for a downgrade because the pension fund liabilities will look worse than the others.
CHIOTAKIS: What does this mean then for cities and states going forward. I mean these are the folks putting these funds out right?
LARKIN: My own feeling on pensions is that right now we’re looking at pension funding at an all time low. Stock market which is a big source of their investment income, as started to come back. We’ll start to see those numbers improve. I understand some pension funds have already shown improvement for 2010. So as that get’s better this problem will probably start to fade away, but right now, Fitch I think is trying to play catch up and say we’re going to use this as a reason to downgrade ratings. I don’t think it’s going to be a lot of ratings, but I think it could be a handful of very visible, very large state and local governments that could see their bond ratings downgraded.
CHIOTAKIS: All right, Dick Larkin, director of credit analysis at Herbert J. Sims. Dick thanks.
LARKIN: Thanks Steve.
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