Internet Explorer 11 is not supported

For optimal browsing, we recommend Chrome, Firefox or Safari browsers.

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.

Charles Guerin/MCT
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.”

Liz Farmer is a former GOVERNING fiscal policy writer.
Special Projects
Sponsored Stories
In recent years, local governments have been forced to adapt to a wildly changing world, especially as it pertains to sending bills and collecting payments.
Workplace safety is in the spotlight as government leaders adapt to a prolonged pandemic.
While government employees, students and the general public had to wait in line for hours in the beginning of the pandemic, at-home test kits make it easy to diagnose for the novel coronavirus in less than 30 minutes.
Governments around the nation are working to design the best vaccine policies that keep both their employees and their residents safe. Although the latest data shows a variety of polarizing perspectives, there are clear emerging best practices that leading governments are following to put trust first: creating policies that are flexible and provide a range of options, and being in tune with the needs and sentiments of their employees so that they are able to be dynamic and accommodate the rapidly changing situation.
Service delivery and the individual experience within health and human services (HHS) is often very siloed and fragmented.
In this episode, Marianne Steger explains why health care for Pre-Medicare retirees and active employees just got easier.
Government organizations around the world are experiencing the consequences of plagiarism firsthand. A simple mistake can lead to loss of reputation, loss of trust and even lawsuits. It’s important to avoid plagiarism at all costs, and government organizations are held to a particularly high standard. Fortunately, technological solutions such as iThenticate allow government organizations to avoid instances of text plagiarism in an efficient manner.
Creating meaningful citizen experiences in a post-COVID world requires embracing digital initiatives like secure and ethical data sharing, artificial intelligence and more.
GHD identified four themes critical for municipalities to address to reach net-zero by 2050. Will you be ready?