Moody’s Downgrades CalPRS, CalSTRS 3 Notches Each to Aa3

SAN FRANCISCO — Moody’s Investors Service issued a three-notch downgrade to the credit enhancement programs of both the California Public Employees Retirement System and California State Teachers Retirement System.

Both systems’ programs were downgraded to Aa3 from Aaa late Thursday; Moody’s had placed them on review for possible downgrade in July.

Both programs’ short-term ratings of Prime-1 were not affected. Both focus on providing credit enhancement, such as letters of credit and standby bond purchase agreements, for relatively short durations.

“Today’s rating action reflects our expectation that the cumulative back-to-back market value declines in the investment portfolios of both CalPERS and CalSTRS for the fiscal years ended June 2008 and 2009 will exacerbate long-term projected actuarial funding shortfalls, recent market gains notwithstanding,” Martin Duffy, vice president and senior credit officer for Moody’s, said in a news release.

Moody’s noted that the maturity profile of both liquidity and credit commitments is less than five years for each plan, and there is significant liquidity available to service draws as these may occur.

“Throughout the recent credit crisis, each fund had ample resources to meet all draws without realizing any losses,” Moody’s said, adding that the enhancement obligations of each program are well-diversified.

Moody’s said the bond ratings based on a direct-pass through of program ratings include two issues backed by the CalPERS program and 12 backed by CalSTRS.

That does not include issues rated based on a joint default analysis of both the obligor and the applicable program, which have been placed on watch list for possible downgrade, pending a review of the level of default correlation between the program providing the letter of credit and the obligor.

Standard & Poor’s assigns its top A-1-plus short-term rating to the CalPERS credit-enhancement program. For CalSTRS, it assigns a long-term issuer rating of AA and an A-1-plus short-term rating.

Fitch Ratings assigns its AAA long-term and F1-plus short-term ratings to the CalPERS credit enhancement program. It rates the CalSTRS program AA-plus and F1-plus following a long-term downgrade in August, when it noted that CalSTRS is uniquely handicapped compared to CalPERS and other public pension programs, because it does not have the power to adjust its contribution rates.

As of Sept. 30, CalSTRS had credit-enhancement commitments on $2.54 billion in outstanding municipal debt, a quarterly report posted on its Web site said.

According to the most recent information available from CalSTRS, in its comprehensive annual financial report for June 30, 2008, the credit-enhancement program had contingent liabilities of $1.7 billion.

A phone call to CalSTRS Friday was met with a message that the office was closed because of a scheduled unpaid furlough day for state employees. At CalSTRS, where the “furlough Fridays” program also applies, the phone just kept ringing.

CalSTRS launched its credit enhancement program in 1994; initially it was limited to covering issuers in California and its three adjoining states, but it expanded to nationwide coverage in 2005.

CalPERS launched its credit enhancement program in 2005.

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