August 14, 2013 / 4:37 PM / 7 years ago

Pensions, debt may have more weight in Moody's U.S. muni ratings

WASHINGTON, Aug 14 (Reuters) - Moody’s Investors Service may give greater weight to pensions and debt in its rating system for general obligation debt sold by U.S. local governments, it said in a proposal released on Wednesday.

The proposed changes would reflect just how much pension liabilities affect finances of local governments, the ratings agency said.

Currently, debt and pensions make up about 10 percent of a Moody’s rating of a local government’s general obligation bonds, which are repaid with tax revenues and have the government’s full faith and credit. Under the proposed change, the weighting of debt and pensions would rise to 20 percent.

Moody’s said in a statement that the greater emphasis also recognizes that both pensioners and debtholders have “enforceable claims on the resources of local governments.”

Pew Center on the States estimates that U.S. cities are short $99 billion to pay for their pensions.

The Moody’s proposal comes after the emergency manager for Detroit, Kevyn Orr, spooked the $3.7 trillion municipal bond market over general obligation debt, pension liabilities and the payment of bondholders.

Orr has said holders of Detroit’s general obligation bonds, historically seen as the safest form of municipal debt, should be considered unsecured creditors, which could force them to take losses on their investments. At the same time, as he guides the city through the largest municipal bankruptcy filing in U.S. history, Orr is openly fighting with labor unions over the size of Detroit’s pension liability.

Moody’s also would change the weight of economic factors to 30 percent from 40 percent, reflecting how some local governments are “either unwilling or unable to convert the strength of their local economies into revenues.” It pointed to tax caps, anti-tax sentiment and the lag that local governments often face between a recovery in real estate prices and a pick-up in property taxes as reasons.

The modifications would likely not affect the vast majority of the 8,200 local governments the agency rates, the rating agency said. It added that the median rating for U.S. cities is Aa3, for counties Aa2 and school districts Aa3.

“The U.S. local government sector is largely investment grade-rated, with only a handful of incidents of default,” the agency said in the proposal.

Moody’s will take comments from the public on the proposal until Oct. 14.

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