Proposed Federal Bill Would Be A Boon to Pensions, Moody’s Says

Proposed federal legislation to standardize pension reporting to a central repository would improve transparency and likely improve pension funding, Moody’s Investors Service said in a special comment released Monday.

The Public Employee Pension Transparency Act, HR 6484, would require state and local governments to file annual financial statements for their pension plans with the Treasury Department. It would also require future liabilities to be calculated using a discount rate based on Treasury rates. Pension funds would have the option of reporting liabilities using different methodologies, as long as they also used the standardized calculations.

The variety of methods currently used makes it difficult to compare different pension plans, according to Moody’s analyst Wesley Smyth. “When you use uniform guidelines, basically everyone’s on a level playing field and so therefore there’s just more comparability,” he said.

Unlike pensions in the corporate world, which are searchable on the Labor Department’s website, state and local government pension reports are scattered.

“If you’re going to try to aggregate data across states, across governments in a county or wherever for whatever purposes, you have to go to multiple different websites,” Smyth said. “It becomes a very laborious and confusing task.”

The proposal would change the way the discount rate used to calculate unfunded liabilities is determined. Under Governmental Accounting Standards Board Rule 27, the discount rate is based on the expected long-term rate of return of the plan’s investments. This bill would require the discount rate to be based instead on a modified Treasury yield curve that is used in corporate pensions.

The approach would likely lower the discount rate currently used and result in lower reported pension funding levels and larger gaps, Moody’s said. This in turn could lead state and local governments to take steps to narrow the gaps.

“They may increasingly decide to take a more aggressive approach to funding these obligations in view of this new presentation and that could in some cases lead certain issuers to allocate more of their budgets to this purpose,” said Moody’s analyst Ted Hampton. “Obviously, the positive outcome of that is improved pension funding status over time.”

Many states have already taken actions to close funding gaps. According to a November report by the Pew Center on the States, 19 states either reduced pension benefits or increased employee contributions in the first 10 months of 2010.

Pew also reported that states have gaps between the money put aside and future liabilities of $452 billion for pensions and $555 billion of retiree health care liabilities.

The bill has garnered criticism in some corners of the municipal bond world since it was introduced last week. New York State Comptroller Thomas DiNapoli said the proposal relied on scare tactics.

“The bill mixes private-sector and public-sector accounting practices in order to present a distorted picture of pension fund solvency,” DiNapoli said in a statement. He said that the discount rate used for private companies, which can go out of business, was “inappropriate” for state governments, which cannot.

“A government’s discount rate aims to reflect the fund’s actual rate of return over time,” he said. “Properly run pension funds continually review their rates of returns.”

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Washington
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