In July 2012, Moody's released to subscribers a request for comment draft of proposed adjustments to be made by Moody's to the pension data reported by U.S. state and local governments. These adjustments, if adopted, could influence local government credit ratings. Moody's has indicated in this draft report that state credit ratings might not be impacted by the changes; however, the proposed adjustments would still be made and considered for state plans.

The proposal would involve several key changes to be made to the reported liabilities of state and local government pension plans. These would include adjusting liabilities to reflect a 5.50% discount rate using a uniform assumed liability duration of 13 (an assumption which would result in an approximate 13% increase in liabilities for every decrease in discount rate of 1%); using market value of assets rather than any smoothed value reported by the plan; amortizing any resulting unfunded actuarial accrued liability over a 17-year period on a level-dollar basis; and allocating liabilities for cost-sharing plans according to proportionate share of total plan contributions.

Moody's has stated that these adjustments, if adopted, would likely result in rating actions for those local governments where the adjusted liability is outsized for the rating category, and where the plan has not shown the ability to increase funding or otherwise respond to shortfalls.

However, some actuaries and plan sponsors have voiced concerns that these adjustments may be too broad to appreciably improve metrics for individual plans. In particular, using a duration of 13 to adjust liabilities may cause some very mature plans to appear more sensitive to changes in the discount rate than they actually are, while some younger plans may in fact be more sensitive to changes in discount rate than a duration of 13 would predict. Additionally, amortizing the resulting unfunded actuarial accrued liability (based on market value of assets) over a 17-year period on a level-dollar basis is likely to show significantly higher contribution amounts in early years of the unfunded liability amortization, because most systems use a level percentage of pay methodology, which results in increasing contribution dollars over time.

The deadline for comment on the Moody's proposal was August 31, 2012; however, no final Rating Implementation Guideline has yet been published, so it remains to be seen to what extent any final guideline will mirror the draft proposal. Follow Moody's here.