ANCHORAGE — State treasurers voted Monday to urge Moody's Investors Service to carefully consider the consequences of its proposed changes to analyzing public-sector pension data, warning it will muddy already complicated pension issues for the public and financial markets.
The resolution, approved during the National Association of State Treasurers annual conference here, stated that NAST has "severe reservations" about Moody's proposed changes. Moody's would allow the pension obligations of state and local governments to be compared and would treat pension liabilities like debt so that it can better analyze the long-term liabilities of governments.
In its 10-point resolution, NAST said: "Moody's reporting of new and different pension liability and cost information at the same time that public plans are beginning to transition to the new Governmental Accounting Standards Board pension accounting standards will create confusion among members of the public, investors and policymakers."
Earlier this summer GASB approved new accounting standards to improve financial reporting for public pension plans. The new standards will require governments to disclose a "net pension liability" figure for the first time on their balance sheets in addition to funding projections, ultimately increasing the accounting of total unfunded liabilities.
NAST also agreed to send a four-page comment letter to Moody's in response to its proposed changes.
One of the goals of the letter "is to ask Moody's to think through, in a more comprehensive and sophisticated fashion, what they are attempting to look at," said NAST president and Nevada Treasurer Kate Marshall.
Maryland Treasurer Nancy Kopp agreed. Even if the changes are just for accounting purposes, it will be confusing for states that have different pricing and operating pension plans while they are beginning to comply with the new GASB rules, she said.
"I think for us to just ask [Moody's] to stand back and look at these more basic issues, that we all share concerns even though our plans are somewhat different and in different situations, is a really an appropriate thing for us to do," Kopp said.
NAST took the action several weeks after Moody's extended the comment period deadline for market participants by one month. Moody's first announced the proposed adjustments in July, which would nearly triple - to $2.2 trillion from $766 billion - the unfunded pension liabilities reported by state and local governments in 2010. The adjustments would highlight the weakest funded pensions and could result in rating downgrades for local governments, the agency said.
"NAST is concerned that the proposed methodology will produce misleading results that could in fact negatively impact the accuracy of financial reports in many cases and distort comparisons across state and local governments," the letter said. "This methodological approach may achieve standardization at the cost of accuracy and thereby distort market pricing of state and local government borrowing."
The discount rate is one of NAST's major concerns, said Janet Cowell, treasurer of North Carolina and chairwoman of the pension and trust investment committee. Moody's is suggesting using the 5.5% corporate bond rate and "that would essentially increase your liabilities for each plan .... In North Carolina we have a 7.25% discount rate, so our liabilities would increase by about 23%," she said.
"We are puzzled by Moody's choice of 'high-grade long-term corporate bond rate' as the discount rate," the letter said, adding that the current long-term corporate bond rate does not bring clarity to future funding decisions nor does it "serve as a meaningful proxy for the return on states' pension assets."
The resolution stated that NAST believes it "would be more appropriate to employ a discount rate which recognizes the fact that public sector pension plans are significantly different from their private sector counterparts."
Another concern addressed in the letter is the market value of assets. Cowell said that it's likely that the value of state assets would be lowered. For example, North Carolina's value of assets would be lowered by 10% under Moody's proposal, Cowell said.
"You are looking at higher liabilities, lower asset values, and essentially under this Moody's proposal your unfunded liability nationally would triple," he said.
Colorado Treasurer Walker Stapleton, who was not present at the business meeting, felt strongly that NAST should not weigh in on Moody's proposals because it is not the business of treasurers to tell the bond rating agencies how to conduct their business, Cowell told the group.
NAST has asked Moody's if it moves forward with its proposal, the treasurers be allowed to preview their methodology and numbers before they are publicly published for verification purposes.
Separately, NAST approved four resolutions at their business meeting, including one that would make permanent a resolution on money-market mutual funds that the group had adopted on an interim basis in March. That resolution opposed further changes to money market fund rules that SEC chairwoman Mary Schapiro had floated, such as moving to a floating net-asset value.
The NAST resolution said the Securities and Exchange Commission's amendments to its Rule 2a-7, which were finalized on May 5, 2010, have made money market funds more transparent, less subject to interest rate risk, more creditworthy and less susceptible to redemption-demand pressure during periods of stress in the financial markets.
The treasurers also renewed two college savings plan resolutions that had been adopted three years ago and had automatically expired.
Finally, NAST approved a resolution to support the Federal Deposit Insurance Corp.'s proposed amendment to extend guarantee of deposits held in qualifying non-interest-bearing transaction accounts until Dec. 31, 2014.