UPDATE 2-Pension gaps prompt Moody's to review 29 local gov'ts

Wed Apr 17, 2013 4:47pm EDT

By Lisa Lambert

WASHINGTON, April 17 (Reuters) - Moody's Investors Service has placed the ratings of 29 U.S. local governments and school districts under review as part of its new approach to analyzing public pension liabilities, it said on Wednesday.

Chicago was put under review - rating agencies have already downgraded Illinois over a yawning pension gap - as were Cincinnati, Minneapolis and Portland, Oregon.

Altogether, the reviews affect $12.5 billion of debt. Fewer than half the reviews involve school districts and schools. There was no immediate impact on state ratings but the rating agency said that pension liabilities have been a factor in their credit rating downgrades and outlook changes over the last few years.

In July, the agency announced it would change how it looks at pension data out of concern that the liabilities created by retirement promises have been underreported. Now it will adjust the data provided by U.S. state and local governments to create "greater transparency and comparability."

"Pension obligations represent a growing source of budgetary pressure for many governments. However, the manner in which these obligations are reported varies widely, and we believe liabilities are underreported from a balance sheet perspective," Timothy Blake, a Moody's managing director, said in a statement.

Blake added that those placed on review were "determined to be significant outliers in their current rating category."

Some of the communities currently have high ratings - for example, Evanston, Illinois, is rated "Aaa."

Chicago's general obligation bonds are rated "Aa3".

PENSION BATTLE STILL RAGES

The United States is in the grips of a fierce battle over public pensions after the 2007-09 recession exacerbated problems that had dogged public employee retirement systems for years. States and cities had frequently shortchanged their public pensions, and when their revenues crumbled during the longest and deepest economic downturn since the Great Depression they cut back even more.

Meanwhile, the financial crisis wrecked the chief revenue source for public pensions, investment returns.

Pension funds' holdings have slowly recovered, but the debate over the size of their gaps remain. The Pew Center on the States estimates U.S. cities combined are short at least $99 billion and states $757 billion.

Many conservative lawmakers and economists say the pensions project rates of return that are too high, making their shortfalls appear smaller by using overly optimistic expectations for investments. Meanwhile, many question if their methods of "smoothing" expenses over time mask the extent of the problems.

Last month, the U.S. Securities and Exchange Commission rapped Illinois for its pension accounting maneuvers and on Wednesday the largest pension fund, Calpers, voted to change its smoothing.

Moody's said it is re-adjusting data reported by state and local governments and is also considering many of the reforms under consideration across the country.

Last week, Fitch Ratings said that for some of the more than 1,000 local governments it rates underfunded retirement systems would create budgetary pressure.

Moody's rates more than 8,000 local governments in the United States, which means it has put less than 1 percent of those it evaluates under review.

The local governments under review were spread across just eight states. The highest concentration is in Ohio, with 12 cities, counties and school districts affected.

The agency expects any rating changes from the reviews will be downgrades of one notch or two.

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