Proposed Pension Reporting Changes Could Hurt Governments

July 12, 2012 ( – Moody’s Investor Services issued a request for comment about a proposal to implement four changes to pension reporting by state and local governments.

According to a Segal Bulletin, the four proposed adjustments to pension liability and cost information reported are: 

  • Actuarial accrued liability (AAL) would be discounted using a high-grad long-term corporate bond index rate: For adjustments to 2010 and 2011 pension data, the discount rate would be 5.5%, based on Citibank’s Pension Discount Curve. To implement the discount rate adjustment, Moody’s proposes using a 13-year duration estimate as a measure of the average life of benefit payments. Consequently, each plan’s reported AAL would be projected forward for 13 years at the plan’s reported discount rate and then be discounted back at 5.5%. 
  • Asset valuation smoothing would be eliminated in favor of reported fair value of assets as of the actuarial reporting date: This would be applied to fiscal 2010 pension data for states. Moody’s is still evaluating whether adequate data is available to make this adjustment for local governments starting with fiscal 2011. 
  • For states, annual pension contributions would be calculated using both a new discount rate and uniform Unfunded AAL (UAAL) amortization: Segal explained there are two components of annual contributions: employer normal cost (ENC), which is the employer’s share of liabilities accrued in a given year net of annual employee contributions; and the amortization payment, which is equal to the amount necessary to eliminate the unfunded liability over a given amortization period. Moody’s proposes adjusting the ENC to reflect its common 5.5% discount rate and the amortization payment to reflect its adjusted unfunded liability, a common amortization period and a level-dollar funding approach. The ENC adjustment would use a 17-year active employee duration estimate for all plans. 
  • For multiple-employer cost-sharing pension plans, liabilities would be allocated proportionately according to each employer’s share of the total contribution. 

If Moody’s adopts these proposed changes, it estimates that fiscal 2010 reported UAAL for the 50 states and the local governments that it rates (covering 3,500 pension plans) would increase from $766 billion to $2.2 trillion, according to the Segal Bulletin. For states, the adjustments would increase annual contribution amounts from $36.6 billion to $128.8 billion, or from 2.6% of revenue to 9.1% of revenue.  

Moody’s does not believe the proposed changes will lead to rating changes for the states, but acknowledges that they could have an impact on ratings for local governments.  

The proposal is on Moody’s website,, for subscribers.  Comments should be sent via e-mail to by August 31.