Pension liabilities could lower government credit ratings
U.S. states and localities’ unfunded pension liabilities — estimated at more than $2 trillion — could soon result in lower credit ratings for many governments, according to Reuters. Moody’s Investors Service, the Wall Street credit agency, is considering new rules that could affect governments’ credit ratings beginning this fall.
Moody’s is seeking public comment through the end of August on proposed changes in how it treats pension liabilities. Some of the changes are in line with new accounting rules for pension funds approved in June by the Governmental Accounting Standards Board (GASB), an independent board that recommends financial and reporting standards for state and local governments.
Moody’s proposed changes include revising the rate used to calculate pension liabilities. That would cut the discount rate used to calculate pension liabilities from about 8 percent to 5.5 percent.
The result would be to significantly increase a state or locality’s assumed pension liability. For example, a plan with a $10 billion liability based on an 8 percent rate would see that amount leap to $13.56 billion if a 5.5 percent rate were used, according to Reuters.
GASB approved new accounting standards that for the first time require governments providing defined benefit pensions to recognize the long-term obligations for pension benefits as a liability. The rules also require governments to improve reporting about the costs of pension benefits in financial statements and other documents.
The changes are likely to hit local governments particularly hard. Moody’s estimates that the total pension liabilities for fiscal year 2010 were more than three times the amount reported by local governments.