State and local governments experienced more ratings downgrades than upgrades in the third quarter, according to Moody's Investor Service, in part because of the new way the ratings agency assesses pension liabilities.
The new pension calculation caused Moody's to downgrade Chicago, Cincinnati and Minneapolis, among other cities. Of the 145 local government downgrades, 19 were attributed to pension liabilities.
“We expect pension liabilities to be an ongoing credit pressure for some local governments, but for many issuers, pension liabilities should remain manageable and should not adversely affect ratings,” Moody's said in the third-quarter report issued Monday.
In April, Moody's revised its approach to state and local government pension data to address what officials there considered underreporting of pension liabilities on government balance sheets, and to increase comparability among plans by investors and credit analysts. At the time, it placed the general-obligation bond ratings of Chicago, Cincinnati, Minneapolis, Portland and 25 other governmental units on review for possible downgrade because of relatively large net pension liabilities.
Moody's is also reviewing comments on its proposal to increase the weight of debt and pension obligations to 20% from 10% in its ratings of local-government general-obligation bonds while decreasing other economic factors.
Moody's said Monday that downgrades are expected to outpace upgrades through the rest of 2013, despite economic improvement. The 77% of rating actions that were downgrades in the Q3 was a slight improvement from the 83% in the previous quarter.
