WASHINGTON - Standard and Poor's has released a report describing how it's incorporating into its credit ratings the pension information reported by local governments under newly applicable standards from the Governmental Accounting Standards Board.
While localities may report different numbers for S&P to examine under the GASB changes, the "framework for our analysis remains the same," S&P credit analyst Lisa Schroeer told The Bond Buyer.
The rating agency is referring to GASB statements 67 and 68 on pension reporting, which were adopted in 2012. GASB 67 applies to the reporting of pension plans for fiscal years beginning after June 15, 2013, and GASB 68 applies to governments' reporting for fiscal years beginning after June 15, 2014.
S&P's ratings for local government general obligation bond ratings are based on the assessment and scoring of seven factors. Pensions play a role in three of the factors: debt and contingent liabilities, budgetary performance and management, Schroeer said. The report focuses on how the new GASB methodology affects a government's debt and contingent liabilities. The assessment of the government's budgetary performance and management is not changing, Schroeer said.
The rating agency will make a negative qualitative adjustment to an issuer's debt and contingent liabilities score if the government has "an unaddressed exposure to large unfunded pension or other post-employment benefit (OPEB) obligations, leading to accelerating payment obligations over the medium term that represent significant budget pressure," the report said. Local governments' scores in this area will be weakened by one point if they have plans to address their pension or OPEB issues and by two points if they do not.
S&P said it considers several variables when deciding whether to lower local governments' debt and contingent liabilities scores due to their unfunded liabilities: magnitude, time frame, trends and managerial actions.
When GASB looks at a government's trends in funding levels and contributions, it will take into account different measurements that the government is reporting as a result of the GASB changes. "We believe that a decreasing trend in funding levels or in the percentage of required contributions actually contributed will likely lead to an increase eventually in contributions and potential budget stress," the rating agency said in the report.
The most notable change under the newly applicable GASB statements for S&P's local government analysis is how the assets and liabilities are calculated. Under the GASB changes, the funded ratio will not be calculated with a smoothing ratio, so it "is likely to have more volatility due to fluctuations in the market," the rating agency said. Still, S&P will look at the trend in liabilities in relation to the government's ability to address the fluctuations.
Under the new methodology, governments' with benefits administered through cost-sharing multiemployer plans will have to report their share of the net pension liability. "The increased disclosure for these plans will allow us to better assess the effects of outstanding liabilities, funding levels, and trends as their reporting will now be on par with that of single employer plans," S&P said.
Due to the GASB changes, S&P will also look at new numbers when looking at the magnitude of pension and OPEB costs.
S&P considers a combined pension and OPEB carrying charge near or more than 10% as elevated, triggering further review. This carrying charge is the sum of a locality's annual required pension contributions and OPEB pay-as-you go- contributions measured as a percentage of total governmental funds expenditures.
Under the new GASB statements, local governments no longer have to report an annual required contribution, but they must report an actuarial or statutorily determined contribution. Most local governments fund annual pension payments relative to these contribution determinations. S&P said its analyses will consider localities' actuarial, statutorily or contractually determined contribution as its required contribution.
When it comes to the time frame, S&P analyzes budget impacts from increasing pension or OPEB funding requirements over the "medium term," or the next two or three years, as well as how projected future liabilities could impact the overall credit. The rating agency said it will factor longer-term projections into its analysis if it believes "that budget stress will develop over the longer term due to rising pension costs or liabilities and those rising costs remain unaddressed by management."
S&P's analysis of managerial actions is not changing as result of the GASB standards. The rating agency will continue to evaluate whether management is taking action to address pension or OPEB issues if their magnitude is high and the trend in metrics "indicates a current or potential material budget impact," the report said.
