WASHINGTON — Moody's Investors Service is proposing adjustments to U.S. public sector pension data that would nearly triple — to $2.2 trillion from $766 billion — the unfunded pension liabilities reported by state and local governments for 2010.
The rating agency described the adjustments and potential impact in a report released Monday and asked for public comments on the proposal.
Moody's said the four proposed adjustments to the pension information reported by states and localities would result in rating changes for some of the more than 8,500 local governments the agency rates.
The proposed adjustments would highlight the weakest funded pensions, but alone are not expected to result in rating changes for states, according to the rating agency. Moody's said it is still evaluating the full magnitude of the proposed adjustments on local governments where the effect would be outsized relative to their rating category.
"For states, the problem with pension liabilities are pretty well known and there has been a lot of action in response to pension pressures," said Marcia Van Wagner, a senior analyst with Moody's. "For local governments there are some outliers that we are expecting to find that we wouldn't have necessarily known about prior to doing these adjustments."
The proposals include: allocating multiple-employer cost-sharing plan liabilities to specific government employers based on proportionate shares of total plan contributions; adjusting accrued actuarial liabilities based on a high-grade long term corporate bond index discount rate; replacing asset smoothing with the reported market or fair value as of the actuarial reporting date; and adjusting annual contributions to reflect the these changes as well as a common amortization period.
"This proposal is part of our ongoing efforts to bring greater transparency and consistency to the analysis of pension liabilities, which have driven a number of downgrades and outlook changes for states and cities," the report said.
If Moody's makes the changes, they would be the most comprehensive made by any major rating agency thus far, a spokesman said.
Analysts at Standard & Poor's and Fitch Ratings were reviewing the proposal and were unable to immediately provide comments on it and how it compares to their pension analysis.
Public pension costs are an ongoing a strain on city finances. Most recently, Stockton, Calif., became the largest municipality by debt ever to file for Chapter 9 protection. Stockton faces an estimated $26 million gap for the next fiscal year. Moody's has been developing the adjustments for over one year, said Timothy Blake, Moody's managing director of public finance. The rating agency already incorporates an analysis of pension obligations for rating state and local government debt. Blake said the adjustments would build on its current approach to rating state and local government debt.
While the rating agency considers the proposed adjustments, they have requested comment from market participants on whether the changes would improve comparability and enhance the credit analysis of rated entities.
"Growth of reported unfunded pension liabilities during the past decade and the associated budgetary burden of pension contributions have increased the impact of underfunded pensions on state and local government credit analysis," the report said. Moody's treats pension liabilities similar to debt in order to better analyze the long-term liabilities of government entities.
Specifically, the rating agency is seeking feedback from market participants on two items: the usefulness of the adjustments in enhancing the comparability of pension obligations among state and local government entities; and the efficacy of treating pension liabilities similarly to debt to improve the analysis of the long-term liabilities of those governmental entities.
Historically, Moody's has relied on pension data reported by public pension systems in annual financial reports and typically summarized in governmental financial disclosures. However, the reported data typically reflects standard accounting practices which can hinder the ability to make meaningful peer comparison, Moody's said.
Blake said the proposed adjustments are similar in many respects to some of the pension accounting standards recently passed by the Governmental Accounting Standards Board.
All comments to Moody's are due by August 31 and can be sent to email@example.com. If the adjustments are adopted, they would go into effect later this year, Blake said.