Moody's New Rules May Mean More Downgrades
Moody’s Investors Service announced its highly anticipated new ratings rules, which could result in downgrades for dozens of cities and school districts.
Moody’s Investors Service on Wednesday announced its highly anticipated new ratings rules, in a move that could result in downgrades for dozens of school districts and municipal governments, including Chicago, Cincinnati, Santa Fe, Minneapolis, and Portland, Ore.
Under the new rules, Moody's is revamping the way it analyzes and adjusts pension liabilities as part of its credit analysis of state and local governments. These changes reflect a 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,” according to a press release announcing the new rules. As a result of the new approach, Moody's immediately placed on review the general obligation bonds for 29 municipalities that have large adjusted net pension liabilities. Those bonds now face a possible downgrade.
"Pension obligations represent a growing source of budgetary pressure for many governments. However, the manner in which these obligations are reported varies widely, and we believe liabilities are underreported from a balance sheet perspective," Timothy Blake, a Moody's managing director, said in a statement. "The purpose of the adjustments is to provide greater transparency and comparability in pension liability measures for use in credit analysis."
The new rules differ slightly from the agency’s original proposal from last summer. But the plan to adjust pension debt using a long term bond index rate remains in tact. (Moody's did adjust that proposal to use the bond index rate posted as of the valuation date of each plan.) Moody's new discount rate will likely result in rates of return that are smaller than the 7 to 8 percent assumption over 30 years that most governments use in calculating their pension liabilities. In its explanation, Moody's said its approach estimates the value of expected benefit payments by current employees over their careers using current market interest rates as the guide to the current value of future cash flows.
“Because interest rates are currently at an historic low, the market approach to measuring liabilities results in much larger current total liabilities than those reported using the conventional governmental approach,” the agency report detailing the changes said.
In other new rules, asset smoothing will be replaced with reported market or fair value as of the actuarial reporting date and the resulting adjusted net pension liability will be amortized over 20 years. A shorter amortization period would also have the effect of increasing pension liabilities as most state and local governments use the 30-year amortization period (a Generally Accepted Accounting Principle). The original proposed change had a 17-year amortization period, a number based on the estimated service time left for the average municipal worker.
The report noted that just 2 percent of governments were likely to have their rating affected by the new rules.
“As pensions are just one of many factors we consider in a rating, any downgrades resulting from the subsequent reviews are likely to be limited to two notches,” the report said. “The affected ratings will be for those local governments whose adjusted pension obligations relative to their resources place them as significant outliers in their current rating categories.”
Join the Discussion
After you comment, click Post. You can enter an anonymous Display Name or connect to a social profile.
LATEST FINANCE HEADLINES
Why States’ Tax-Cut Fever Has Subsided24 minutes ago
Lawmakers Unite Against Governor to Give Chicago Some Pension Relief14 hours ago
Feds Censure Maine Town Over Financial Records4 days ago
Atlantic City Rescue Plan Sent to Gov. Christie4 days ago
The Week in Public Finance: Special Sessions, Chicago's Pension Deal and a Historically Giant Tax Break4 days ago
How Zika Could Infect the Municipal Bond Market4 days ago