WASHINGTON — Two groups are urging Moody’s Investors Services to delay its proposed changes to analyzing public sector pension data, saying the changes will increase confusion and reduce transparency of pension liabilities.
The National Association of State Retirement Administrators and the National Council on Teacher Retirement, sent a 5-page comment letter to the rating agency late last week, just before the public comment period ended Sept. 30.
Both groups represent a mix of trustees, administrators, and public officials who oversee approximately $3 trillion in pension assets and benefits for 21 million working and retired state and local government employees.
In July, Moody’s first announced the proposed adjustments, which would nearly triple — to $2.2 trillion from $766 billion — the unfunded pension liabilities reported by state and local governments in 2010.
The rating agency extended the deadline by one month for comments on its proposed changes after market participants requested the extension.
Moody’s proposed adjustments would highlight the weakest funded pensions, but alone are not expected to result in rating changes for states, the rating agency said. It is considering four principal adjustments to as-reported pension information including replacing asset smoothing with reported market or fair value as of the actuarial reporting date.
The rating agency will be analyzing the feedback over the next few weeks and will publish the final adjustments later this fall, David Jacobson, communications strategist with Moody’s, told The Bond Buyer.
Moody’s would not disclose the amount of comment letters but Jacobson said that they have received a “substantial amount of comments with a broad range of opinions.”
NASRA and NCTR join the majority of state and local groups who oppose the changes. Last month the Government Finance Officers Association said in a letter that there would be no benefit derived from introducing a competing methodology for measuring pension liabilities and cost.
NASRA and NCTR argued in their letter that the introduction of another set of calculations in addition to the new rules set forth by the Governmental Accounting Standards Board “will result in increased, widespread confusion and misunderstanding of the meaning and implication of public pension actuarial measures,” the letter said. “This, in turn, will be exacerbated by selective use, drawing on the funding level figure that best fulfills the objective of the user.”
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.
The two groups said that the likely outcome of adhering to the new GASB accounting standards will be the production by most public pension plans of two sets of actuarial calculations: one to meet GASB requirements and another to inform policymakers of the plan’s funding requirements.
NASRA and NCTR said that Moody’s should give the new GASB standards an opportunity to be used and evaluated before imposing another set of methods to measure and report public pension data.
Similar to concerns expressed by the National Association of State Treasurers, NASRA and NCTR believe that using Moody’s suggested 5.5% corporate bond discount rate is “inappropriate for the public sector.”
“Applying a single discount rate to measure these plans will result in distortion and confusion, not clarity and transparency and any comparability among plans will not be meaningful,” the letter said.
Separately, the “Big Seven” state and local groups that developed a pension funding task force earlier this year, released a 2-page draft on Monday of their recommended standards and practices for pension funding policies.
The report, “Pension Funding Policy Guidelines,” addresses how employers should calculate the annual required contribution.
“The last decade has been a sobering time for government leaders and pension plan sponsors,” said Dan Crippen, executive director of the National Governors Association. “Planning for the long-term is essential. These draft guidelines can provide a framework for policymakers to update their pension funding policies.”
The “Big Seven” includes the National Governors Association, the National Conference of State Legislatures, the Council of State Governments, the National Association of Cities, the National League of Cities, the U.S. Conference of Mayors and the International City/County Management Association.
The draft guidelines were developed to identify practices for the systematic funding and consistent reporting of funding progress. The task force, which was created in response to the new GASB accounting standards, is exploring options that might be needed to phase in new practices over a period of years.
State and local governments should have a pension funding policy that addresses five objectives and is based on an actuarially determined ARC, the task force said.
The five policy objectives include: ensure pension funding plans are based on actuarially determined contributions; build funding discipline into the policy to ensure promised benefits can be paid; maintain intergenerational equity so the cost of employee benefits is paid by the generation of taxpayers who receives services; make employer costs a consistent percentage of payroll and require clear reporting to show how and when pension plans will be adequately funded.
“Governments likely will need to strike a balance between competing objectives and determine the most appropriate time frame in which to meet their goals,” the draft report said.
The task force said that these guidelines will likely be updated periodically to reflect changes in actuarial practice with regard to funding policy.