By Carten Cordell | Watchdog.org Virginia Bureau
ALEXANDRIA — The way states calculate their pension debt may soon change, but don’t expect an improved outlook.
Moody’s Investor Service, a New York-based credit rating agency, is looking into changing its accounting standards on pensions to provide a clearer debt picture for states and municipalities.
“In recent years, pensions have been a driving factor in a number of (credit) rating downgrades and outlook changes,” said Moody’s spokesman David Jacobson. “We have always considered pensions in our analysis, but we think it is time to bring greater transparency to the pension data.”
At the heart of the changes is an adjustment on how state and local governments should calculate the discount rate — the rate in which governments project investment growth over a period of time.
States determine the annual contribution needed to pay for retirement and health-care costs of former employees. The discount rate, however, assumes that rate of growth, then discounts that figure from the payment.
And while no pension plan has a universal discount rate, Moody’s thinks many of the rates are too high, projecting returns better than the actual results, consequently covering the depth of a particular liability.
“We want to give some comparability to pension liability,” Jacobson said. “Sometimes, if you look at 10 different issuers, they will crunch their numbers in 10 different ways, so we want to make that uniform, as well.”
Moody’s is proposing a 5.5 discount rate over a 17-year amortization period, the debt period in which the discount rate can be applied to measure investment returns. The effect of applying the Moody’s rates to pension plans is to provide a more streamlined, accurate figure of the health of those plans. But it comes with the price of recalculating billions to the debt sheet and possibly affecting credit ratings.
“We think it is more realistic,” Jacobson said.
The Virginia Retirement System uses a 7 percent discount rate in calculating its contributions over a 30-year amortization period. VRS reported that as of June 30, its pension plan was 70 percent funded with an unfunded liability, or debt, of $23.95 billion.
But those numbers will rise under the Moody’s proposal. VRS isn’t sure how much.
“We are staying abreast of the various changes and will be working with those as we move forward,” VRS spokeswoman Jeanne Chenault said.
Moody’s introduced its plan in July, and it recently extended its request for comment on the proposal by a month, giving issuers until Sept. 30 to voice their appraisal of it.
The proposal also came of the heels of another accounting rules change set by the Governmental Accounting Standards Board, an independent organization that sets government financial reporting and accounting standards. The GASB plan calls for a single discount rate and more information on the pension plans than now disclosed. But while it goes into effect in 2014, Jacobson said, Moody’s proposal would be implemented quicker.
“Some of them do parallel with what we have, but the big thing is ours will go into effect at the end of the year,” he said. “I don’t GASB’s will go into effect until 2013 or 2014.”
But while the Moody’s proposal will provide a clearer picture of pension health, some say it won’t be a complete one.
“It will give us a slightly starker picture,” said Eileen Norcross, a senior research fellow at the Fairfax-based George Mason University Mercatus Center. “The numbers will rise. The extent that they rise will depend on the individual system and the proportion of the liability that is funded versus unfunded. The more unfunded the liability, the greater the impact.”
Moody’s also projects that no state’s credit ratings will be affected by the proposed accounting changes. But it’s report noted that when the new figures were applied to the combined 2010 unfunded liability of the 50 states’ retirement plans, the debt jumped from $766 billion to $2.2 trillion.
Norcross said Virginia’s new pension reform, which cuts benefits and moves state employees onto a 401K-style plan exclusively in 2014, may require more action once the debt numbers are recalculated.
“It will depend on what Virginia’s picture looks like,” she said. “How many years will they have to fill in the hole, what do they gain by moving employees into a hybrid plan or curtailing benefits? They have to look at the budget and decide, ‘Is this something we are going to think about today or put off?’”
Carten Cordell can be reached at email@example.com