Moody’s Investors Service announced Wednesday that it has placed the general obligation bond ratings of 29 local governments and school districts, including Chicago, Cincinnati, and Minneapolis, on review for possible downgrades due to its new methodology for analyzing public pension liabilities.
Several other cities placed on review for possible downgrades include Las Vegas, N.M., Santa Fe, N.M., Portland, Ore., and Evanston, Ill., a suburb of Chicago.
These possible downgrades reflect the rating agency’s view that “pension obligations are a significant source of credit pressure for governments and warrant a more conservative view of the potential size of the obligations,” Moody’s said.
The total amount of debt under review by the rating agency is $12.5 billion. No state ratings have been placed on review at this time and the updated methodology is not expected to have an immediate impact on state ratings, it said.
The 29 local governments and school districts that have been placed on review have large adjusted net pension liabilities relative to their rating category, Moody’s said.
Moody’s said it expects any rating changes resulting from the new pension adjustments could be one or two notch downgrades. Most reviews should be completed within 90 days but could take as long as 180 days, according to the 15-page report.
“Pension obligations represent a growing source of budgetary pressure for many governments,” said Timothy Blake, Moody’s managing director. “However, the manner in which these obligations are reported varies widely, and we believe liabilities are under-reported from a balance sheet perspective. The purpose of the adjustments is to provide greater transparency and comparability in pension liability measures for use in credit analysis.”
Moody’s also said that the impetus for the changes is to create a balance sheet liability concept that is similar to that used in the private and not-for-profit sectors and comparable to measures of debt outstanding as of a specific point in time.
The majority of government pension obligations remain manageable in the context of their revenues and resources, and those ratings that were placed on review were determined to be “significant outliers” in their current rating category, Moody’s said.
Moody’s rates over 8,000 local governments and less than 1% of those with general obligation or equivalent ratings have been placed under review as a result of the new pension adjustments. The rating agency said it expects less than 2% of the total population of local general obligation and equivalent ratings will be placed under review for possible downgrade as a result of adopting the pension adjustments.
The pension adjustments also apply to public universities, public power and mass transit authorities.
In July 2012, the rating agency announced its intent to revamp the way it reviews public pension data reported by state and local governments. It opened a public comment period for market participants through the end of September.
The four principal adjustments to pension plan data largely reflect their original proposals from July when Moody’s said unfunded pension liabilities reported by state and local governments in 2010 would nearly triple to $2.2 trillion from $766 billion.
“After two years of study, supplemented with an extensive centralized database collection and analysis effort, we believe the adjustments we are adopting provide us with improved pension measures that will be important and consistent inputs to our government credit analysis,” the agency said in the report.
They final adjustments include: multiple-employer cost-sharing plan liabilities will be allocated to specific government employers based on proportionate shares of total plan contributions; accrued actuarial liabilities will be adjusted based on a high-grade long-term taxable bond index discount rate as of the date of valuation; asset smoothing will be replaced with reported market or fair value as of the actuarial reporting date; and the resulting adjusted net pension liability will be amortized over 20 years using a level-dollar method to create a measure of annual burden related to the net pension liability.
These changes come after the Governmental Accounting Standards Board finalized its accounting standards to improve financial reporting for public pension plans. Those new rules will increase the accounting of total unfunded liabilities in particular for systems that already have funding problems.
Similar to the GASB rules, the Moody’s adjustments are not a requirement, but rather intended for the purpose of evaluating pension risk in the context of its credit ratings. The GASB standards are not binding, but state and local governments must meet them in order to receive clean, or nonqualified, opinions from auditors on their financial statements.
Local governments were quick to respond to Moody’s announcement and overwhelmingly rejected the new pension adjustments.
New York City Comptroller John C. Liu said that the new methodology “will be used as a flawed rationale by those trying to reduce the retirement security of hardworking public employees.”
Liu stressed that the city has 670,000 participants in its public pension fund system and it will continue to be strong. He noted that the city’s pension liabilities are reported following the GASB standards and it has consistently made its full statutorily required contributions.
In Chicago, Mayor Rahm Emanuel is pressing for state support to cut benefits to shore up the city's four pension funds and ease a looming $550 million spike in payments owed for the public safety pension funds. City and employee pension payments are set by a state-imposed statutory formula and not on an actuarially based contribution.
"Mayor Emanuel has taken critical steps to right Chicago's financial ship, but it is Springfield that must act and pass pension reform," a city statement read. "Without needed reform, the city cannot move forward and critical services will have to be slashed. This problem is decades in the making and must be addressed. The Mayor will work with anyone willing to fix this broken system and continues to urge the state legislature to act."