Magazine article Government Finance Review

Advice to a Rating Agency

Magazine article Government Finance Review

Advice to a Rating Agency

Article excerpt

In July 2012, Moody's Investors Service issued a request for comment that solicited the views of interested parties on a proposal to henceforth evaluate the creditworthiness of state and local governments using its own measures of the cost of pension benefits, rather than the measures presented in audited financial statements prepared in conformity with generally accepted accounting principles. In the guise of "bringing greater transparency and consistency to the analysis of pension liabilities," Moody's proposed an essentially "one-size-fits-all" approach to pensions that would effectively overstate pension obligations by applying an unreasonably low discount rate, rather than the long-term rate of return on investments prescribed by generally accepted accounting principles in most circumstances. In April 2013, Moody's announced that it would go forward with the changes proposed in the request for comment, with only minor modifications, over the strong objections of many respondents, including the Government Finance Officers Association.

In August 2013, Moody's issued a second proposal that will double the weight assigned to pensions and debt at the expense of the weight assigned to economic factors. This second proposal, like its predecessor, appears to be a reaction to recent widely publicized but ultimately unfounded claims that state and local governments face a looming "pension crisis." Barring a few well-publicized exceptions, public pension systems are well funded.

There are at least two reasons to be troubled by Moody's recent actions. First, the cause of enhanced transparency is hardly advanced when Moody's takes it upon itself to act as though it were a standard-setting body and introduce its own measures that depart from generally accepted accounting principles.

Second, inappropriate conservatism in financial analysis in no virtue, as the Financial Accounting Standards Board, which sets authoritative standards of accounting and financial reporting for business enterprises, explains in FASB Concepts Statement No. …

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