Moody's Investors Service does not expect its ratings to change based on municipalities' compliance with, or initial implementation of, the Governmental Accounting Standards Board's new financial reporting model, GASB 34.
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But investors may eventually expect local governments to comply with GASB 34, and those issuers' borrowing costs may rise if they do not disclose the additional information required under the new model, Moody's officials said yesterday.
"Moody's is not demanding compliance with GASB 34," Julie Beglin, an assistant vice president, said during a teleconference with investors. But "Moody's believes the market will come to expect compliance with GASB 34 and that interest rate pricing might eventually reflect a perceived lack of disclosure from entities that do not implement it ," she said.
Moody's sponsored the teleconference call to address investors' concerns about how issuers' implementation of the new reporting model will affect the rating process. The new model, which dramatically changes the way state and local governments collect and report financial information, was adopted by GASB on June 10, 1999, after about 10 years of development.
The new model calls for governments to issue two government-wide financial statements. One is a statement of net assets that shows assets and liabilities. It will force governments to examine their infrastructure to determine their assets and to include all outstanding debt on the liability side. The other statement focuses on activities and will describe major governmental programs and services, their costs, and the extent to which those costs are covered by self-generating fees, taxes, or other revenues.
GASB 34 is being implemented on a phased-in basis over a three-year period, depending on the size of the government. Large governments with revenues of $100 million or more were to have begun using it for fiscal years ending after June 15, 2002. Small governments, with revenues of less than $10 million, are expected to begin using it for fiscal years ending after June 15, 2004. GASB cannot mandate compliance with the new model, but governments will need to adopt it to get clean opinions from their auditors.
Issuers and investors have been concerned about the new reporting model because it will result in major changes in their financial statements that may be difficult to compare to their earlier statements. In addition, GASB 34 will cause some governments to show deficit net asset positions for the first time.
In the teleconference call, Moody's officials, led by Linda Hird Lipnick, a managing director in the rating agency's public finance group, talked about their stance on GASB 34, which was detailed in a "special comment" paper released last month.
"GASB 34 will not change Moody's approach to credit analysis," Lipnick said. "It may raise new questions but overall we do not anticipate wholesale rating changes as a direct result of GASB 34."
"We expect a good faith effort at disclosure no matter what the accounting presentation," she said.
Beglin said Moody's expects the new reporting model to result in greater transparency, new information, a clearer bottom line evaluation of overall governmental operations, and improved trend analysis. "But the new financial statements will not, in and of themselves, lead to rating changes," she said.
Moody's will continue to focus its ratings on five key credit factors -- security, debt, the economy and demographics, finances, and management, she said.
An issuer's decision not to comply with the new model also generally should not result in rating changes, although Moody's will want to examine the reason for noncompliance, Beglin said. If the issuer has decided the costs outweigh the benefits, that would not affect the rating process, she said. But if Moody's finds that noncompliance is the result of weak management, that may affect the rating process because management is one of the credit factors Moody's considers.
Douglas Benton, a vice president and manager of Moody's Dallas office, said despite the new information to be provided under GASB 34, Moody's will still focus on a government's capital plan and on fund balances at the individual major fund level.
