enhancing the analysis of local government pension obligations and an update on virginia’s...
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Enhancing the Analysis of Local Government Pension Obligations and An Update on Virginia’s Economic Indicators
Barbara Ruth Rosenberg, Director
U.S. Public Finance, Tax Supported
June 9, 2011
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Overview
• Role of pensions in credit analysis
• Factors reviewed when analyzing pensions
• Assessing the burden on an issuer’s resources
• Standardizing investment returns
• Governmental responses and ramifications for credit quality
• Virginia statistics
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The Role of Pensions in Credit Analysis
• Debt ratios: bonded debt and analogous obligations
• Outstanding debt instruments
• Obligations to employees and retirees for future pension and health benefits
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Pension Analysis Factors
• Type of plan: SE versus AME versus CSME• Single-employer (SE): single plan which covers single government
• Agent multi-employer (AME): single plan in which each participating government has separately tracked assets, liabilities, contributions, and actuarial assumptions
• Cost sharing multi-employer (CSME): single plan which pools the assets, liabilities, and contributions of numerous governments
• Responsibility – contributions & benefits
• Magnitude of liability• Unfunded actuarial accrued liability (UAAL) = actuarial accrued liability (AAL) less actuarial assets
• Funded ratio
• Size of resource base
• Contributions as percent of budget
• Funding history
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Actuarial Assumptions
Basic idea: meet a future obligation by setting aside funds now
• Who is and will become eligible?
• How long will they receive payments, how much will they be?
• What is the payment now to cover payments in the future?
• What will the investment pool earn over time?
• Norm: 7.5% - 8.5%
• Changes to asset valuation
• Norm: 5 year smoothing
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Analysis of Funded Ratio
• Has there been stabilization?
• Effect of most recent market declines
• What is the issuer’s commitment to funding ARC?
• ARC often set at a fixed percentage of payroll by law – regardless of actuarial need, or
periodically changes due to some other mechanism, i.e. corridor
• Often changed as a policy decision – i.e., underfunding for budget relief
• How will the issuer ensure adequate pension funding?
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Assessing Burden on Governmental Resources
• Contribution as percent of budget over time
• Noteworthy: pension funding >10% of operating budget
• UAAL as percent of market value for local governments (excluding state-wide CSME
allocation)
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Enhanced Analytics: Standardized Investment Return
• Improve comparability
• Fitch to consider funded ratio utilizing 7% investment return assumptions
• Relatively conservative assumption due to uncertain economic outlook, increased risk and
volatility, and weaker returns over the past decade
• Adjust AAL by 11% for each 1% adjustment to investment return
• Funded ratio ≥ 70% adequate; <60% weak
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Governmental Responses
• Long history of pension payments
• Evidence of governmental efforts to improve pensions
• Fitch believes public support to moderate benefits
• Vast majority of governments will withstand pressures, albeit by taking difficult steps
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Virginia Retirement System
Actuarial Date
6/30/08 6/30/09
ARC Funded (%) 81.3 66.6
Reported Funded Ratio
(7.5% return on
investment)
84.0 80.2
Fitch Adjusted Funded
Ratio (7% return on
investment)
79.6 76.0
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GO Rating Distributions – Virginia Versus Nation
Excludes school districts and
special districts0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
AAA AA+ AA & AA- A+ and below Downgrades since6/1/09
Virginia
Nationally
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Job Growth in Past Year
Source: BLS, April 2011YOY % Δ in Nonfarm Payrolls
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Personal Income
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Housing Starts
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Housing Price Change
Source: FHFA Home Price Index, YOY % Δ Q 1 2011
Source: FHFA Home Price Index, YOY % Δ Q 1 2011
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Median Home Price
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US
Baltimore-Towson,MDRichmond, VA
VBch-Norf-NNews,VA/NC DC-Arlg-Alex,DC/VA/MD/WV South
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Disclaimer
Fitch Ratings’ credit ratings rely on factual information received from issuers and other sources.Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings are inherently forward-looking, embody assumptions and predictions that by their nature cannot be verified as facts, and can be affected by future events or conditions that were not anticipated at thetime a rating was issued or affirmed.
The information in this presentation is provided “as is” without any representation or warranty.A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does notaddress the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned.A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its agents in connection with a sale of securities.
Ratings may be changed or withdrawn at any time for any reason in the sole discretion ofFitch Ratings. The agency does not provide investment advice of any sort. Ratings are nota recommendation to buy, sell, or hold any security.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM.
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