Budget & Finance

Moody's Wants to Weigh Debt, Pensions More for Local GOs

WASHINGTON — Moody's Investors Service is considering changing its rating analysis for local government general obligation bonds to give more weight to debt and pension liabilities, it announced Wednesday.

The rating agency would increase the weight for pensions and debt to 20% from 10%. It would also decrease the weight for economic factors to 30% from 40%. Finally, Moody's wants to introduce a scorecard for local governments to enhance the transparency rating process.

Moody's analysis for GO ratings are based on four broad factors including: economic strength, financial strength, management and governance, and debt profile. The rating agency employs a weighted average approach to analyzing these factors to decide upon a final rating range.

The new methodology would apply to bonds issued by approximately 8,200 local governments including counties, cities, school districts and other special districts in the U.S.

Moody's is requesting public comment on the proposals be submitted to it no later than Oct. 14.

"An increase in weight attached to debt and pensions would recognize the potential for large pension liabilities to constrict local government's financial flexibility," Moody's said in a release. "Pension liabilities and debt each represent enforceable claims on the resources of local governments."

Moody's said the debt portion of its current methodology "should be weighted more heavily to capture the combined effect of both debt and pensions."

Reducing the weight attached to economic factors, Moody's said, recognizes that some local governments are either unwilling or unable to convert the strength of their local economies into revenue gains. For example, a city might be unwilling to increases taxes because of anti-tax sentiment, it said.

Moody's announcement comes just three weeks after Detroit filed for Chapter 9 bankruptcy, making it the largest such municipal filing in U.S. history. Detroit, which has struggled with an array of economic challenges for decades, has more than $18 billion of debt, including sizeable unfunded pension liabilities.

The city's pension funds have reported a $644 million gap, according to 2011 actuarial valuations. However, Michigan Gov. Rick Snyder insists his estimate of a $3.5 billion gap is more accurate. Either way, it doesn't bode well for labor unions and current and retired city government workers.

To make matters worse, Detroit's emergency manager Kevyn Orr, has said that Detroit GOs should be considered unsecured, potentially resulting in investor losses.

Earlier this year the Pew Center on the States estimated that the most populous cities across the nation have a $99 billion pension shortfall as of fiscal year 2009, the most recent year with complete data.

The scorecard Moody's proposed would not be a final rating, but rather a starting point for its analysis as it measures the most important factors for local government GO credit analysis.

If the proposed methodology revisions are adopted, some GO ratings would change, although the vast majority of them would not, Moody's said. Any potentially affected ratings would be placed on review upon publication of the final methodology.

Comments should be sent to RFC@moodys.com.




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