S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Other CriteriaAnalytical evaluationStandard & Poor’s analytical approach to publicpension fund ratings begins with determining thegovernment sponsor’s general creditworthiness,which includes examining the sponsor’s pension contributionhistory. In evaluating the sponsor’s creditworthiness,that is, its ability to continue to makepension contributions in the context of its otherfinancial obligations and commitments, considerationwill be given to the strength and priority ofrequired contributions relative to other financial obligationsof the government sponsor. Standard &Poor’s will determine if the sponsor’s pension contributionsare discretionary or constitutionally protected,or, if there is a legal priority for pension contributionsrelative to other financial commitments.Standard & Poor’s will also examine the sponsor’sfunding objectives, along with the sponsor’s willingnessand ability to cure funding deficits. Moreover,Standard & Poor’s will calculate how significant thepension funding requirements and liabilities are relativeto the sponsor’s operating budget.Public pension funds are typically single-employerdefined benefit plans, or multiple-employer(agent or cost-sharing) defined benefit plans sponsoredby state or local governments. In multipleemployerplans, the pension fund receives contributionsfrom a number of governments and theiremployees. A government that is the sole sponsorfor the public pension fund may provide severalseparate plans for different classes or types ofemployees. Funding levels and requirements mayvary, so it would not be accurate to assume oneplan’s creditworthiness could serve as a proxy foranother plan funded by the same sponsor.Multiple-employer pension plans may or may notinclude state funding participation. To assess thecreditworthiness of the government sponsor wherethere is no state participation, a portfolio analysisof the credit characteristics of the local governmentparticipants is necessary. Where a multiple-employerplan includes both state and local governmentemployees and funding requirements, such as acost-sharing plan, the state’s credit rating will besignificantly weighted—under a multiple-employercost-sharing program, the state is typically thelargest employer and contributor, therefore makingthe plan substantially dependent on the state’s creditworthinessfor its ongoing solvency.For multiple-employer teachers’ retirement systems,with or without state-required funding ofcontributions, the state’s general credit rating maystill be viewed as a proxy for the underlying creditworthinessof the governmental sponsors, sincestates traditionally provide substantial fundingresources to local school districts for educationalexpenses, and teachers’ salaries and other compensationare usually the largest component of schooldistrict spending.The ability of the public pension fund to exceedthe sponsor’s general credit rating by up to one fullrating category will hinge on the strength of thefund’s three remaining basic analytical areas.Pension Fund IndependenceStandard & Poor’s considers independence as beingan essential factor in deciding whether the pensionfund’s credit rating can exceed that of its sponsor.The assessment of independence is largely qualitativein nature and includes a thorough documentationanalysis and a meeting with fund officials.Issues to consider include:■ Are pension board directors appointed independently,with staggered terms, or do they serve atthe pleasure of the government sponsor?■ Are operating and/or investment decisions vestedsolely in the management of the pension fund, orare they influenced or determined by the governmentsponsor’s representatives?■ Are contribution rates determined independently,based on actuarial needs, or are they merely afunction of the sponsor’s annual budget process,subject to the sponsor’s financial condition on ayear-to-year basis?■ Can pension assets be reclaimed or diverted by,and to, the government sponsor for other uses?■ How can actuarial assumptions used to determinepension-funding levels be influenced orrevised?Despite the inherent connection between pensionfund and sponsor, the degree to which a pensionfund can demonstrate that its managerial structureand operations are independent of sponsor controland influence is a credit factor. Although the sponsortypically sets the retirement benefits promisedto employees, many pension funds are designed toretain significant autonomy in direct managementand operating areas.In general, credit strength will be accorded to apension fund where it can be verified that the fundcan operate independently of its sponsor in the followingareas:■ Legal authority: the basis for the establishment,organization, and operation of the pension fund;■ Management: the basis for election or appointmentof those charged with responsibility forpension fund administration;■ Policy making authority: investment guidelines,asset allocation, and risk management, and, overallcontrol of asset portfolio;330 Standard & Poor’s Public Finance Criteria 2007