Moody’s Evidently Thinks the State Has an Obligation for the UC Pension

Calpensions.com is reporting that Moody’s is counting state (any state, not just California) pension debt, along with regular bond debt, in calculating total obligations. Presumably, this sum will be considered in rating bonds. I imagine most folks will take this as Bad News. But note that UC has struggled to get the state to acknowledge that it had a liability for the UC pension. The state is making contributions to its other major pension plans, CalPERS and CalSTRS, but it is not doing anything for UC, forcing the University to divert resources from its general operations.

Thanks to efforts of the UCLA Faculty Assn., the Legislative Analyst has begun acknowledging that the state has some liability for UC's pension system. But no dollars have flowed from that recognition. No dollars are included in Gov. Brown's budget proposal for 2011-12.

There is some ambiguity in the report as to what Moody’s is counting. But calpensions seems to think that UC is in the mix. That can be taken as Good News since it adds pressure on the state to do something affirmatively regarding the UC pension and its unfunded liability.

Below are excerpts from the calpensions report:

Moody’s begins treating pensions like bond debt

Ed Mendel, 1-31-11

A leading credit-rating agency, Moody’s, has begun treating unfunded pensions like bond debt, giving California a combined tax-supported debt of $136.9 billion that is well beyond other states but also may be understated.

The decision to add pensions to bond debt announced by Moody’s Investors Services last week reflects concern about public employee pension costs, which are growing as state budgets plunge deep into the red during a lengthy economic downturn.

…In the past, said Moody’s, pension funding levels were factored into state credit analysis. But the annual state debt reports were based only on the value of outstanding bonds as a percentage of income and other factors… California currently has one of the lowest bond ratings of any state, A1 from Moody’s.

…California’s combined bond and unfunded pension debt is 162.6 percent of annual state revenue, Moody’s said, ranking 19th among states. Oregon leads with debt equal to 316.8 percent of revenue, while Nebraska is the lowest, just 2.3 percent.

…The Moody’s report lists California’s combined debt as $136.9 billion ($87.3 billion bonds and $49.6 billion unfunded pensions).

…The Moody’s listing of California’s unfunded pension liability, $49.6 billion, apparently reflecting a lag in annual state reports, is similar to the total before major pension fund investment losses in the 2008 stock market crash. The unfunded liability separately reported by the three state pension funds as of June 30, 2009, totaled $91.5 billion: California Public Employees Retirement System $48.6 billion, California State Teachers Retirement System $40.5 billion, and the University of California Retirement Plan $2.4 billion.

The Moody’s report acknowledges a dispute over the way public pension funds estimate their unfunded liability. The funds use their investment earnings forecast, often about 7.75 percent, to offset or “discount” their future pension obligations.

Some economists argue that public pensions should use a lower discount rate based on “risk-free” government bonds because the pensions are “risk-free,” guaranteed by the taxpayer.

The Governmental Accounting Standards Board may adopt a blended discount rate. For any part of future pension obligations not covered by assets assumed to grow at the forecast earnings rate, a lower “risk-free” discount rate would be used…

Full report at http://calpensions.com/2011/01/31/moodys-begins-treating-pensions-like-bond-debt/

Anything that pushes the state to pay up is more Good News than bad: