WASHINGTON — The Government Finance Officers Association is urging Moody’s Investors Service to refrain from moving forward with its proposal to change its analysis of public-sector pension data and recalculate the pension liabilities of state and local governments.
“Now that the new [Governmental Accounting Standards Board pension accounting] standards have been issued and implementation is about to begin, the GFOA believes there is no benefit to be derived from introducing a competing methodology for measuring pension liabilities and cost,” the group’s executive director, Jeff Esser, said in a four-page letter to the rating agency.
The GFOA, which has had its share of disagreements with GASB in the past, told Moody’s that it’s concerned Moody’s proposal “undermines the legitimate authority of the GASB as the independent standard-setter of generally accepted accounting principles for state and local governments.”
The group contrasted Moody’s “expedited three-month process” of soliciting and collecting comments on its proposals, with GASB’s three-year “systematic and transparent approach” to develop its pension accounting standards, during which the board issued no less than three documents before approving final standards.
Moody announced four major proposed adjustments to its analysis of pension data for ratings in July and has since set a Sept. 30 deadline for receiving comments on them from market participants. The rating agency said the adjustments would provide a more transparent and conservative view of unfunded pension liabilities and would allow for the comparison of different plans.
“We seek to create a measure of unfunded pension obligations that recognizes the contractual nature of accrued benefits and will be similar, but not identical, to bonded debt as a liability on balance sheets and a factor affecting future budgets,” the rating agency said.
It estimated that its proposed adjustments, if put in place, would nearly triple — to $7.6 trillion from $2.2 trillion — the unfunded pension liabilities reported by state and local governments for 2010.
Moody’s proposed four major adjustments that will: allocate multiple-employer cost-sharing plan liabilities to specific government employers based on proportionate share of total plan contributions; adjust the accrued actuarial liabilities based on a high-grade, long-term corporate bond index discount rate, which would be 5.5% for 2010 and 2011; replace asset smoothing with the reported market or fair value as of the actuarial reporting date; and adjust annual pension contributions to reflect these changes as well as a common amortization period.
But in its letter, the GFOA said the proposals “fail to recognize differences in actuarial assumptions concerning the accrual of the liability” and “could add volatility to the calculation of pension liability.”
The group also said the adjustments “could be arbitrary” and would “set a precedent for making similar adjustments to other state and local liabilities,” such as other post-employment benefits, or OPEB.
“This expansion of Moody’s analysis also suggests that credit ratings could face additional downward pressures as uncertain future pension costs come to appear more concrete,” the GFOA said in its letter.
“Given that Moody’s recently recognized the stronger credit quality of state and local governments compared to corporate debt issuers, credit ratings downgrades as a consequence of this new methodology would, in essence, constitute a reversal of the ratings recalibration,” it added.
The GFOA pointed out that GASB’s pension accounting standards, which were approved on June 25, incorporated some of Moody’s proposals.
They included reallocating the liabilities of multiple-employer cost-sharing plans to specific government employers based on their proportionate share of total plan contributions, and replacing asset smoothing with reported market or fair value.
However, GASB opted to retain the long-term expected rate of return on plan investments as the discount rate, rejecting the use of a bond index rate for discounting liabilities, except in certain limited cases, the GFOA said.
Moody’s is essentially proposing to now add a third estimate, in addition to the accounting number, to comply with GASB’s standards and the funding number produced by actuarial valuation for budgetary purposes, the GFOA said.
The agency added that it will “confuse rather than enlighten end-users,” such as investors.
The GFOA urged Moody’s “to resist treating pension obligations as essentially just one more form of debt.”
Instead, it said, Moody’s should “continue to treat pension liabilities as a distinct element in its credit analysis of governments.”
Moody’s issued a statement yesterday stressing that these are just proposals at this point and that it extended the comment deadline until Sept. 30 at the request of a significant number of market participants.
“We have agreed to accommodate these requests and are reviewing all market feedback,” Moody’s said. “We encourage feedback from our issuers and the investment community as we determine what the final adjustments will be. We have received a substantial number of responses reflecting a broad range of opinions. We are reviewing the comments at this time and will be summarizing the feedback after the comment period closes.”