Moody's Investors Service plans to adjust how it evaluates public pension liabilities, which would result in a nearly tripling of its calculation for 2010 fiscal year aggregate unfunded liabilities, according to a report from the credit agency.
The proposed adjustments would increase for unfunded actuarial accrued liability for state and local governments to $2.2 trillion from $766 billion at the end of fiscal year 2010.
The report constructed hypothetical contributions for states to reach full funding within a 17-year period. By that measure, state pension contributions would have been $128.8 billion in fiscal year 2010, compared to the $36.6 billion actually contributed.
The four main adjustments to pension reporting are:
- 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 corporate bond index discount rate (5.5% for 2010 and 2011).
- Where possible, asset smoothing will be eliminated in favor of market or fair value as of the actuarial reporting date.
- Annual pension contributions will be adjusted to reflect the foregoing changes as well as a common amortization period.
Moody's created the adjustments to provide “greater clarity and comparability to investors, and to assess the scale of pension liabilities in a way comparable to debt obligations,” the report states.
“Our proposed adjustments will improve the comparability and transparency of pension information across governments, enhancing our approach to rating state and local government debt,” Timothy Blake, senior vice president, public finance group, and co-author of the report, said in a news release.
The report says the adjustments alone are not expected to change any state ratings. However, Moody's will “take rating actions for those local governments whose adjusted liability is outsized relative to their rating category.”
Moody's used data from all 50 states, 8,500 local governments and more than 14,000 individual pension plans. Market participants can provide feedback to Moody's by sending comments to [email protected] by Aug. 31.