Tennessee’s decision this year to revamp its pension plan heads in the right direction to stronger credit, according to one of the nation’s largest bond rating agencies.
Moody’s Investor Service said switching from a defined benefit plan to a hybrid system that weaves in aspects of a defined contribution plan is a positive credit move for the Volunteer State.
“The legislation is credit positive because it lowers the state’s contribution to the new plan and provides the state with greater control of its future pension expenses,” said Julius Vizner, an analyst who contributed to Moody’s Credit Outlook report on credit implications of current events released May 6.
However, pointing out the credit implications of the pension changes doesn’t signal that the state’s bond rating will change, said a Moody’s spokesman.
“Moody’s declaration of ‘credit positive’ or ‘credit negative’ does not connote a ratings change. We are stating what the potential impact of these actions could be on an issuer’s credit rating,” said David Jacobson.
State lawmakers voted to adjust the pension system this year, a plan from state Treasurer David Lillard and signed into law last month by Gov. Bill Haslam.
Changes to the pension system apply to new government employees — including teachers and higher education workers — hired after June 30, 2014. Retirees would need to wait until turning 65-years-old or until their age plus years of service equals at least 90 to cash in on pension benefits.
Current employees are not required to contribute to their pension benefits, although workers hired under the plan will have put in 5 percent. Current K-12 teachers already contribute that amount.
Tennessee now sports a “Aaa stable” rating from Moody’s, which is one highest rating issued by the agency. High ratings means the state is able to borrow money at a lower rate.