NASHVILLE — Representatives of the big three rating agencies told non-dealer municipal financial advisors to expect more questions for their clients about pension obligations in the wake of Detroit’s bankruptcy filing. However, new pension and general obligation bond metrics are unlikely to cause a widespread drop in muni credits, they said.
Analysts from Fitch Ratings, Moody’s Investors Service, and Standard & Poor’s told members of the National Association of Independent Public Finance Advisors meeting here on Oct. 11 that recent events such as Detroit’s filing warrant new approaches to rating municipal general obligation bonds.
Standard & Poor’s has rolled out a new GO bond rating methodology, while Moody’s has created new pension obligation metrics.
Jessalynn Moro, a managing director at Fitch, described the story of Detroit’s downfall through a rating agency analyst’s eyes.
“There was a little bit of sunshine,” she told the advisors, referring to a period in the mid- 1990’s where Detroit appeared to be on the upswing and its pension obligations were well-funded. “Then the rains came, and it’s been raining ever since.”
Detroit emergency manager Kevyn Orr and Detroit’s pension systems disagree on the size of the city’s unfunded liability, which Orr says is about $3.5 billion and the pension funds contend is closer to $700 million. Fitch now rates the city at well into junk levels. Moro told conference attendees that Michigan’s strong state intervention program ultimately did little to maintain Detroit’s credit. Though she told the group that downgrading a major American city to junk was difficult for even experienced analysts to wrap their heads around, she was quick to respond in the negative when asked by one participant if the Detroit experience will mean widespread downgrades.
“The answer right now is no,” Moro said, adding that Michigan credits will likely be revaluated depending on the ultimate outcome of the battle between the pension funds and bondholders. But the entire portfolio of rated cities nationwide is not likely to experience an overhaul. “I don’t think that makes sense,” she said.
Tim Blake, a managing director at Moody’s tried to prepare advisors for the rating agency’s new approach on pension liabilities. Moody’s began applying revised pension methodology in June, placing equal weight on pension liabilities and traditional debt.
“Your clients can expect more questions about their pension costs,” Blake said. He added that the more flexible nature of pension liabilities, which are estimates, means Moody’s will not consider bond debt and pension obligations to be “dollar for dollar” equivalents.
“We are mainly focused on capacity to pay,” he said, warning that a municipality failing to pay to actuarial levels, even if meeting its obligations under a cost-sharing plan, will be a credit negative.
Standard & Poor’s director and analytical manager Kate Choban said her agency’s new methodology could cause credit pressure for about 10% of GO bond ratings, but could improve about 30% of them. Half the Standard & Poor’s methodology is a combination of an issuer’s economic health and management track record.
She told the advisors that the agency has created an Ipad app that allows them to plug in their own numbers to get rating scenarios. “You can see what effect it might have on the rating,” she said.