Chicago, Cincinnati, Minneapolis and 26 other municipalities may face credit-rating downgrades affecting $12.5 billion in debt because pension liabilities are underreported, Moody’s Investors Service said.
Moody’s said it’s reviewing the cities and school districts for possible rating cuts after it changed the way it analyzes retirement obligations. No state ratings are affected, Moody’s said in a report released Wednesday.
Retirement obligations are a “significant” credit pressure for localities and call for a more conservative view of the potential size of the liabilities, Timothy Blake, a Moody’s analyst, said in the report. Moody’s made the changes to its methodology to bring it closer to what’s used in private industry, Blake said.
“The manner in which these obligations are reported varies widely, and we believe liabilities are underreported from a balance sheet perspective,” Blake said in the report. “The purpose of the adjustments is to provide greater transparency and comparability in pension-liability measures for use in credit analysis.”
The 18-month recession that ended in 2009 has left U.S. localities with retirement-funding deficits. As of 2010, U.S. states’ public pension funds had $757 billion less than they needed for retirement payments they had promised workers, according to the Washington-based Pew Center on the States.
Changes to Moody’s analysis include designating multiple- employer cost-sharing liabilities to specific employers based on proportionate shares and replacing asset smoothing with reported market or fair value, according to the report.
Moody’s said it anticipates the review will result in downgrades of one to two credit levels. Of the 8,000 local governments that it rates, less than 1 percent of those with general obligation or equivalent ratings have been placed under review because of the new pension adjustments.
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