New GASB standards reveal “contribution weaknesses” in public pension funding, but their impact on credit ratings is minimal, said a report from Moody’s Investors Service.
While GASB 67 and 68 require public pension funds to report net pension liabilities, the ratings agency said it already considers unfunded pension liabilities as “debt-like obligations.” Therefore the credit impact is minimal.
Moody’s approach to evaluating credit risk remains “fundamentally unchanged,” said Thomas Aaron, assistant vice president and analyst at Moody’s, in a telephone interview.
While their impact on credit ratings might be minimal, the new standards reveal that contributions aren’t always sufficient to prevent liability growth.
For the majority of plans surveyed, Moody’s found that employer contributions did not cover “service cost” plus interest on their net pension liabilities, causing liabilities to grow. Service cost, a new disclosure under GASB 67 and 68, is the “actuarial present value of benefits” for a given year.
Out of the 54 pension funds reviewed, only 13 received employer contributions sufficient to reduce reported net pension liabilities or cover all of the interest and repay some net pension liability principal. Even for those that received their full actuarially determined contributions, only a few received contributions large enough to prevent liabilities from growing, the report said.
The new standards also call for changes in the way discount rates are calculated, but only a few pension funds are expected to be affected by the changes. Under GASB 67, pension funds are required to disclose their depletion dates or when projected benefit payments exceed a retirement system's projected assets. Benefits payable after that date must be discounted using a much lower rate, which raises liabilities. However, only four out of the 54 pension funds reviewed projected a depletion date, suggesting the majority of plans will continue to use a discount rate that matches their assumed rates of return, the report said.
While the majority of plans reviewed did not report depletion dates, they could still experience asset depletion in the future, Mr. Aaron added.
“A big part and huge driver of those projections are investment returns and contributions,” Mr. Aaron said. “Just because those are projected to be healthy in the near term doesn’t mean there isn’t going to be some cash flow risk.”
