OPERS works with ratings agencies

Annual communication related to employers increases transparency

By Betsy Butler, Ohio Public Employees Retirement System

Nov. 10, 2021 – Bond ratings agencies assess the financial position of municipalities and other government entities, including how likely it is that they’ll be able to meet their debt obligations. Three major agencies in the United States account for about 95 percent of all bond ratings: Fitch Ratings, Standard & Poor’s Global Ratings (S&P Global Ratings) and Moody’s Investors Service.

Because many of our employers are subject to this scrutiny, OPERS meets with the ratings agencies annually to share important pension industry insights and maintain transparency. We believe we are the only public pension system in the United States that sustains this type of open relationship with the ratings agencies.

This outreach is an ideal expression of OPERS’ commitment to our core values of teamwork, partnerships and stakeholder advocacy, providing added value to our participating public employers and, by extension, Ohio taxpayers.

Background

OPERS’ annual meetings with these agencies relate to industry standards that began nearly a decade ago.

In 2012, the Governmental Accounting Standards Board issued two new standards that changed accounting and financial reporting requirements for public pensions. They required each public employer to account for a portion of its pension plan’s unfunded liabilities on its balance sheet. 

GASB issued two additional standards in 2015 that changed the accounting and financial reporting requirements for other post-employment benefits, commonly referred to in our industry as OPEB, which include retiree health care.

GASB intended these standards to enhance the pension-related and OPEB-related information in the financial reports of participating employers by providing greater transparency and standardizing the valuation practices from entity to entity. However, the standards not only require separate accounting and financial reporting for pension systems like OPERS, but also call for employers to recognize a net pension asset/liability and net OPEB asset/liability on their financial statements.

While the new standards amounted only to an accounting change that didn’t impact how the plans were funded, there could have been the perception that the employers could be negatively affected by the requirement to post their share of pension and health care liabilities.

OPERS staff worked closely with OPERS-reporting and contributing employers to ensure that they were well positioned to comply with the standards.

What prompted outreach to rating agencies?

Some employers that participate in OPERS (counties and municipalities, for example) issue bonds to finance some of their activities. With the implementation of these new government accounting standards and the accompanying financial reporting disclosures by employers, rating agencies increased their consideration of these liabilities and associated funding commitments, particularly for OPEB, in their bond rating assessments for local and state employers.

All else equal, an employer with higher employee benefit liabilities and, hence, higher expected future funding costs, is considered a higher risk when borrowing money via bond issuances. This added risk leads to higher borrowing costs by way of a higher yield rate.

After the standards were issued, some employers were concerned about receiving downgrades to the ratings assessing their ability to meet principal and interest payments on their bond issuances. In some cases, employee benefit liabilities were generally referenced as one of several factors that could lead to rating downgrades.

Moreover, if the bond rating agencies wanted to ask questions about future plans and other key questions about funding the debt, the employers would not have the knowledge to answer the questions. Therefore, we believed we were in the best position to help put these liabilities in perspective with the bond rating agencies and assist the various employers.

This prompted us to begin conversations in 2015 with representatives of Fitch Ratings, Moody’s and S&P Global Ratings. Our goal is to provide insights related to underlying annual changes in key financial metrics so that the agencies fully understand the reported trends, any plans to address funding and upcoming events or studies, and to keep the rating agencies appraised of OPERS funding structure, policies and ongoing management initiatives that collectively mitigate OPERS’ funding risks.

What do the rating agency calls cover?

During these annual calls, OPERS Analytics & Research staff elaborate on the system’s pension and health care funding structure, safeguards, strategies and trends, offering context and insight into the current and future financial conditions of OPERS’ plans, and, by extension, the financial conditions of participating employers.

In order to provide a complete picture of the system’s financial health, we provide information beyond what is contained in published financial and actuarial valuation reports; management goals; desired changes to plan design and associated risks, such as the significant changes to the system’s health care program that are presently occurring; and the recently concluded experience study to review the actuarial methods and assumptions used in the annual actuarial valuations.

Furthermore, we remind the rating agencies of the important distinctions between OPERS and other states’ pension funds, particularly in OPERS’ statutorily defined fixed contribution structure and the non-guaranteed nature of the system’s health care benefits.

The calls also afford a valuable opportunity for staff to answer any questions the rating agencies might have and to ask the agency representatives about changes in their rating methodologies.

Is this outreach working?

The rating agencies have consistently expressed that the calls help them understand not only OPERS, but also public pension systems in general, since public pension plans share many common characteristics and risks. They’ve also proven to be beneficial in the bond rating process. By helping rating agencies better understand the system, its funded status and projected funding needs, OPERS facilitates their ability to determine a more accurate bond rating.

In working with the ratings agencies, OPERS is able to provide clarity to items that otherwise may be identified as potential concerns and negatively influence bond ratings. This communication affords government entities the opportunity not only to achieve lower interest rates on bond issuances, but also to bring attention to their strengths that outweigh any challenges associated with underfunded pension liabilities.

Betsy Butler

Betsy Butler is the Ohio Public Employees Retirement System’s knowledge and issues strategist, researching information on pensions, retirement and health care. Betsy came to OPERS in 2009 after working as a special collections librarian for two OPERS employers: the Ohio History Connection and Miami University.