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Moody’s: CalPERS’ shorter amortization period is credit positive for state

CalPERS' new policy shortening the $353.5 billion pension plan's amortization schedule, which is expected to result in a more rapid pay down of its unfunded liability, is a credit positive for the state of California, according to a report released Friday by Moody's Investors Service.

Moody's declaration of the move being credit positive is not a rating or an outlook change, but indicated the impact of a certain event on the issuer's credit. Moody's rating of California debt is Aa3 with a stable outlook.

On Feb. 14, the California Public Employees' Retirement System, Sacramento, shortened the period over which actuarial gains and losses are amortized to 20 years from 30 years for new pension liabilities. The new policy will become effective as of the June 30, 2019, actuarial valuations: the fiscal year beginning July 1, 2020, for school districts and the state, and July 1, 2021, for other local governments.

However, the new rules will require earlier and "potentially difficult budget adjustments, which could contribute to an untenable degree of budget strain for some" government entities, the report states. Should there be significant actuarial losses in fiscal year 2019 or later, it could add to employers' pension costs.

CalPERS projects that annual contributions will roughly double from fiscal year 2017 to fiscal year 2025 in nominal dollars, assuming the pension system is able to meet its 7% assumed rate of return, the report states.