Washington Treasurer Takes on S&P

CHICAGO — Washington Treasurer James McIntire last week chided Standard & Poor’s, charging that the rating agency inaccurately reported the funded status of his state’s pension system in a recent national report on looming pension funding and policy challenges facing states.

The dispute focuses on Standard & Poor’s decision, at least initially, to base its review solely on two of Washington’s major plans.

McIntire believes the agency should have looked at all of the state’s 13 pension funds, which combined reported a funded ratio of 100% at the end of fiscal 2008. That’s the same year used by Standard & Poor’s in its report “Pension Funding and Policy Challenges Loom for U.S. States,” published June 30.

Standard & Poor’s, however, took the position that what it considered the state’s major funds should be used in the review and so focused, at least initially, on just defined benefit funds — the Public Employees Retirement System Plan 1 and the Teachers Retirement System Plan 1. Both were closed to new employees in 1977 and combined had a funded ratio of 73.5%.

McIntire slammed the agency in a news release posted on his office’s website, arguing that it failed to recognize the health of all of Washington’s combined funds in which the assets are commingled. He said the report threatened “irreparable harm to the state’s reputation” in the financial markets.

“It is truly unfortunate that Standard & Poor’s inappropriately reported only on the old, long-ago closed plans,” McIntire said in the statement Thursday. “While these plans pose challenges because they were not consistently funded over time, they have been closed for over 30 years and represent only a fraction of our covered workforce.”

Standard & Poor’s revised its report on Thursday, agreeing to include still-open funds that cover public employees and teachers, pushing the funded ratio up to 88%. The rating agency said its initial review was based on historical practice that had excluded the other funds in prior reporting.

McIntire said Friday he appreciated Standard & Poor’s willingness to revise the report, but he remained upset by analysts’ refusal to include all the funds.

Standard & Poor’s defended its position, saying: “As stated in our report, the data presented are combined for the principal, or major, state-sponsored, defined benefit pension funds: generally, the public employees retirement system and the teachers retirement system. Other Washington pension funds were not included due to their smaller, more specialized nature or due to their more locally based and locally funded nature. This is consistent with our decision to exclude similar plans in other states.”

McIntire argued that the methodology is flawed because the assets are commingled and the agency left out plans that cover a good chunk of the state workforce including state patrol, public safety employees, and judges. The 13 public pension plans cover 302,000 current state and local employees and 126,000 retirees.

The rating agency’s position is all the more perplexing to the treasurer as analysts wrote in an April 2009 ratings report that the state administers eight retirement systems, four of which have multiple plans. “Across all plans, except for two, the funded ratio of actuarial assets-to-actuarially accrued liabilities is more than 100% as of June 30, 2007.”

It considered the law enforcement officer and firefighter plans among the largest for purposes of the ratings review.

State and local governments have faced heightened scrutiny over the funding levels of their pension systems as the market downturn and financial crisis in 2008 have led to steep declines in pension funding ratios.

McIntire said the state has been a reform leader, moving to close its more generous plans in the 1970s in favor of more affordable plans that include a hybrid fund that combines defined contributions and defined benefits. Though upset, McIntire said the state is not considering dropping Standard & Poor’s from the roster of rating agencies that review its debt. The state has a AA-plus and stable outlook from the agency.

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