By Lisa Lambert
June 28 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
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
"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.