These changes reflect the rating
agency's view that pension obligations are a significant source of credit
pressure for governments and warrant a more conservative view of the potential
size of the obligations.
Moody’s will make four principal
adjustments to as-reported pension plan data:
- Multiple-employer cost-sharing plan liabilities
will be allocated to specific government employers based on proportionate
shares of total plan contributions;
- Accrued actuarial liabilities will be adjusted
based on a high-grade long-term taxable bond index discount rate as of the
date of valuation;
- Asset smoothing will be replaced with reported
market or fair value as of the actuarial reporting date; and
- The resulting adjusted net pension liability
(i.e. adjusted liabilities less assets) will be amortized over 20 years
using a level-dollar method to create a measure of annual burden related
to the net pension liability.
The rating agency's new approach is
outlined in the report “Adjustments to U.S. State and Local Government Reported
Pension Data,” available on the company's website, here.
Concurrently, Moody's has also released a revised “U.S.
States Rating Methodology” and “General
Obligation Bonds Issued by U.S. Local Governments,” which describe how it
will apply the adjusted pension data to its ratings of those entities. The
updated state methodology introduces a scorecard with explicit weights for
various rating factors and sub-factors, including pensions, as a guide to
approximate credit quality.
The adjustments are not a
requirement or guideline for state or local governments to report or fund their
pension obligations. Moody's is introducing them solely for the purpose of
evaluating pension risk in the context of its credit ratings.
As a result of this new approach,
Moody's has also placed the general obligation ratings of the cities of
Chicago, Cincinnati, Minneapolis and Portland, as well as 25 other U.S. local
governments and school districts, on review for possible downgrade. The
entities whose ratings have been placed on review have large adjusted net
pension liabilities relative to their rating category.