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Announcement:

Moody's announces new approach to analyzing state, local government pensions; 29 local governments placed under review

17 Apr 2013
NOTE: On March 15, 2016, the press release was corrected as follows: In the paragraph regarding methodologies, the publication date of Moody's Approach to the Moral Obligation Pledge was changed from June 1999 to November 2008. Revised release follows.

New York, April 17, 2013 -- Moody's has announced its final approach to the way it will analyze and adjust pension liabilities as part of its credit analysis of state and local governments. These changes reflect the rating agency's view that pension obligations are a significant source of credit pressure for governments and warrant a more conservative view of the potential size of the obligations. As a result of this new approach, Moody's has also placed the general obligation ratings of the cities of Chicago, Cincinnati, Minneapolis, and Portland, OR, and of 25 other US local governments and school districts on review for possible downgrade. The entities whose ratings have been placed on review have large adjusted net pension liabilities relative to their rating category.

"Pension obligations represent a growing source of budgetary pressure for many governments. However, the manner in which these obligations are reported varies widely, and we believe liabilities are underreported from a balance sheet perspective," said Timothy Blake, a Moody's Managing Director. "The purpose of the adjustments is to provide greater transparency and comparability in pension liability measures for use in credit analysis."

The rating agency first announced in July 2012 its intention to make changes to the way it looks at the pension data reported by US state and local governments as it evaluates their credit quality and initiated an open comment period for market participants.

The rating agency's new approach is outlined in the report "Adjustments to US State and Local Government Reported Pension Data", available on the company's website at http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM151398.

Concurrently, Moody's has also released a revised "US States Rating Methodology" (http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM129816) and "General Obligation Bonds Issued by US Local Governments" (http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM151690), which describe how it will apply the adjusted pension data to its ratings of those entities. The updated state methodology introduces a scorecard with explicit weights for various rating factors and sub-factors including pensions, as a guide to approximate credit quality.

The adjustments are not a requirement or guideline for state or local governments to report or fund their pension obligations. Moody's is introducing them solely for the purpose of evaluating pension risk in the context of its credit ratings.

"Significant Outliers"

Moody's said that for the majority of US governments, their pension obligations remain manageable in the context of their revenues and resources.

"The local governments whose ratings have been placed on review were determined to be significant outliers in their current rating category," Moody's Blake said.

The median ratio of Moody's adjusted net pension liability to annual operating revenues as of fiscal 2011 is under 100%. The threshold for Aaa-rated governments to be placed under review as a result of this metric was 300%, or more than three times the median level for the sector. The thresholds applied to entities rated in the Aa, A, and Baa categories were 400%, 500%, and 600% respectively. A summary of the key input data and the Moody's adjustments for each entity with ratings placed under review is available at http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM152921.

Moody's rates over 8,000 local governments in the United States. Less than 1% of those with general obligation or equivalent ratings have been placed under review because of the new pension adjustments. No state government ratings are affected as a result of these changes at this time. However, rising pension liabilities have been a factor in a number of state and local government credit rating downgrades and outlook changes over the last several years.

Moody's expects any rating changes resulting from the current reviews to be one or two notch downgrades and, depending on mitigating factors, some ratings could be confirmed. Most reviews should be completed within 90 days, but some could take as long as 180 days, if necessary.

As part of its analysis, Moody's has also conducted a review of recently enacted pension reforms in relevant states and jurisdictions, to determine whether the changes would be likely to result in a material reduction in accrued pension liabilities subsequent to the fiscal 2011 reporting date.

The reviews affect a total of approximately $12.5 billion of debt. For a number of governments, certain of their special tax, lease, and/or other related ratings have been placed under review as well as their general obligation (G.O.) debt.

The list of local government ratings placed on review follows:

Alamogordo (City of) NM -- Aa3 General Obligation bonds; A1 Gross Receipts Tax Revenue bonds

Carman-Ainsworth Community School, MI -- Aa3 General Obligation bonds; A1 Limited Tax G.O. bonds

Chicago (City of) IL -- Aa3 General Obligation bonds; Aa3 Sales Tax Revenue bonds

Cincinnati (City of) OH -- Aa1 General Obligation bonds; Aa2 Economic Development Revenue bonds; Aa2 Recovery Zone Facility Revenue bonds; Aa2 Annual Appropriation bonds

Douglas (County of) NV -- Aa2 General Obligation bonds

Dublin City School District, OH -- Aaa General Obligation bonds

Elk Grove (Village of) IL -- Aaa General Obligation bonds

Evanston (City of) IL -- Aaa General Obligation bonds

Fairfield City S.D. (Butler County), OH -- Aa2 General Obligation bonds

Fruitport Community School District, MI -- Aa3 General Obligation bonds

Glen Lake Community Schools, MI -- Aa2 General Obligation bonds

Great Oaks Inst. of Tech. & Career Dev., OH -- Aaa General Obligation bonds

Lakota Local S.D. (Butler County), OH -- Aaa General Obligation bonds

Las Vegas (City of), NM -- A1 Gross Receipts Tax Revenue bonds

Mason City School District, OH -- Aaa General Obligation bonds

Minneapolis (City of) MN -- Aaa General Obligation bonds

Murray (City of) KY -- Aa3 General Obligation bonds

Napoleon (City of) OH -- Aa3 General Obligation bonds

Oak Hills Local School District, OH -- Aa2 General Obligation bonds

Orange City School District, OH -- Aaa General Obligation bonds

Petoskey Public Schools, MI -- Aa2 General Obligation bonds

Portland (City of) OR --Aaa General Obligation bonds; Aa1 Limited Tax General Obligation bonds; Aa2 Housing Revenue bonds; Aa2 Gas Tax bonds; Aa3 Urban Renewal and Redevelopment bonds

Santa Fe (City of) NM -- Aa2 General Obligation bonds; Aa2 Gross Receipts Tax Revenue bonds; Aa3 Gross Receipts Tax Revenue bonds; A1 Subordinate Lien Gross Receipts Tax bonds

Santa Fe (County of) NM -- Aaa General Obligation bonds; Aa1 Gross Receipts Tax Revenue bonds

Sycamore Community School District, OH -- Aaa General Obligation bonds; Aa1 Certificates of Participation

Tolles Career and Technical Center, OH -- Aaa General Obligation bonds

Trenton Public Schools, MI -- Aa3 General Obligation bonds

Virginia (City of) MN -- A2 General Obligation bonds; A3 Health Care Facilities Lease Revenue bonds

Wayne County Joint Vocational S.D., OH -- Aa3 Certificates of Participation

PRINCIPAL METHODOLOGY

The principal methodology used in rating the general obligation bonds was General Obligation Bonds Issued by US Local Governments published in April 2013, the principal methodology used in rating the gross receipts tax, sales tax, and gas tax bonds was US Public Finance Special Tax Methodology published in March 2012, the principal methodology used in rating the economic development, recovery zone facility, annual appropriation, urban renewal and redevelopment, certificates of participation, and health care facilities lease bonds was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in December 2011, and the principal methodology used in rating the housing bonds was Moody's Approach to the Moral Obligation Pledge published in November 2008.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Toby Cook
Vice President - Senior Analyst
Public Finance Group
Moody's Investors Service, Inc.
600 North Pearl Street
Suite 2165
Dallas, TX 75201
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Timothy F Blake
Senior Vice President
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's announces new approach to analyzing state, local government pensions; 29 local governments placed under review
No Related Data.
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MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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