UPDATE 1-Pension rules positive for US states, locals-Fitch

Thu Jun 28, 2012 3:58pm EDT

By Lisa Lambert

June 28 (Reuters) - The massive overhaul of accounting for U.S. public pensions is "generally positive" for state and local governments, Fitch Ratings said on Thursday.

The new rules approved by the Governmental Accounting Standards Board on Monday "will reflect a narrower range of assumptions and will recognize changes in a more conservative manner than current standards allow," Fitch said.

The rules also will make "more thorough information" available on financial statements, the ratings agency said.

The new rules replace the menu of financial reporting options that public pension funds currently use with a single system, which will start taking effect next June.

State and local governments will have to post their net pension liability - the difference between the projected benefit payments and the assets set aside to cover them - on their financial statements.

Fitch said it was concerned about one change: Governments will no longer have to report the amount of money their actuaries suggest they pitch in each year, or "annual required contribution."

"Although the ARC reflects a broad array of assumptions that differ from one government to another, in Fitch's view, it also provides a useful measure for whether the government's actual contribution is sufficient to make progress toward fully funding the obligation over time," Fitch said.

For years, states short-changed their pensions by not making their full contributions. When their revenues collapsed during the 2007-09 recession, they pulled back contributions, which provide about 20 percent of pension revenues, even further.

Under the new rules, pensions with insufficient assets to cover their obligations will have to project lower rates of return on their investments, closer in line to the yield on a municipal bond. Those with sufficient assets can continue using their projected rates of return, typically 8 percent. Earnings provide 60 percent of the fund's revenues.

The changes could sting public pensions that are already hurting, said Daniel Berger, senior economist at Municipal Market Data, a Thomson Reuters company.

"States with high unfunded liabilities will be penalized with lower return assumptions, thus creating even more dramatic funding gaps," he wrote.

Weaker states and those with large pension shortfalls, such as Rhode Island, are likely to have higher credit spreads than they have today because they will be seen as riskier, he added.

On Thursday, the U.S. Census said the largest public retirement systems in the country brought in record earnings on their investments in the first quarter.

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