NEW YORK--(BUSINESS WIRE)--Fitch Ratings has published a special report detailing some of the actuarial assumptions and methods that can affect the comparability of unfunded liabilities and annual required contributions (ARCs) reported in financial statements of public sector pensions.
This report examines four such assumptions and methods more closely:
--Investment return assumption/discount rate;
--Asset smoothing method;
--Actuarial cost methods;
--Amortization period.
Current pension accounting rules for state and local governments allow issuers a wide range of choices in calculating key pension variables.
"Comparing the magnitude of a municipal issuer's pension commitments to its other liabilities or comparing the funded status of one public pension plan to another can be difficult and sometimes misleading due to the wide range of permitted assumptions and methods," says Olu Sonola, Director in Fitch's Credit Policy Group. "Standardizing some of these pension variables enhances the analysis of its obligations."
The Governmental Accounting Standards Board (GASB) is currently in the process of revising its financial reporting standards for public pensions. Fitch believes that GASB's process - which will not be implemented earlier than 2013 - is an important step toward improving transparency and comparability of state and local government financial statements, particularly given the decentralized nature of financial reporting by U.S. states and local governments. Other regulatory and legislative efforts to improve disclosure should also help toward improving transparency.
In an accompanying report published Thursday, Feb. 17 titled 'Enhanced Framework for Analyzing U.S. State and Local Government Pension Obligations,' Fitch presented a revised framework for enhancing its analysis of pension liabilities, prior to completion and implementation of pension reporting changes under consideration by GASB. Under this revised framework, Fitch will standardize certain pension variables to improve the comparability of pension data used in Fitch's credit analyses.
Defined benefit pension plans have become a source of near-term concern for many state and local governments, with the steep market declines of late 2008 and early 2009 presenting the public sector with both long- and short-term challenges. Assets available to make benefit payments are lower and ARCs are rising considerably at the same time that government revenues to fund them have dropped and demand for government services has risen.
In some cases, market losses have compounded a pre-existing more fundamental problem caused by consistent underfunding of actuarially required pension payments.
The full report published today is titled 'The Reporting of U.S. State and Local Government Pension Obligations' and is available at 'www.fitchratings.com.'
Additional information is available at 'wwwfitchratings.com'
Applicable Criteria and Related Research: The Reporting of U.S. State and Local Government Pension Obligations
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=599505
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