In addition, state pension plans have significantly increased their investments in hedge funds and other alternative investments in recent years, and many of these asset classes have also suffered losses, Moody’s said in a report issued Monday, according to Markets Media Online.
Last week, three big-city mayors called on government officials to use some of the financial bailout money to help local governments pay their pension costs (See Mayors to U.S. Treasury: We Need Pension Help from Bailout ).
According to Moody’s the stock market losses could have a negative long-term effect on the funded status of government pensions due to the methods of pension accounting. “The actuarial valuation of public pension plan assets is based on an average of several years, rather than the most recent market value,” said Moody’s Assistant Vice President Ted Hampton, according to Markets Media Online. “This approach, known as ‘smoothing,’ spreads the impact of large gains or losses over a set period, such as five or seven years.”
However, Moody’s does not expect downward rating pressure on governments in the near term as a result of these losses. In a recent survey, 80% of respondents identified credit risk as the most important type of risk (See Public Funds Cite Risk Management as a Top Concern ).
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