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

Other Criteriapension fund’s operations and funding status in theevent of an adverse investment environment.Standard & Poor’s will consider the fund to be ofweaker quality when there is consistently belowaverage funded ratios or where the pension systemis closer to pay-as-you-go status (no accumulatedassets, with benefits funded as an annual expense).Standard & Poor’s analyzes the pension fund’scurrent and historical investment returns comparedwith benchmark return targets that have beenimputed into actuarial assumptions. Accordingly, athorough evaluation of the assumed discount rate,including the discount rate’s level of conservativenessand actual rate of return, will be conducted.Investment losses can result in the substantial weakeningof the fund’s asset portfolio, potentiallyPension Fund Rating Documentation■ The statute or constitutional provisions that establish the organization andoperation of the pension fund.■ Five years of audited financial reports for the pension fund sponsor(s).■ Five years of audited financial reports for the pension fund.■ Current pension fund actuarial report with detailed actuarial assumptions.■ Statutory or constitutional requirements for annual sponsor fundingcontributions, and, the terms for employee vesting of plan benefits andemployee contributions and refunds.■ The pension fund’s operating and funding principles, objectives, and strategies.■ Description of current pension fund board and management.■ Statutory and/or formal regulations or guidelines that control allowableinvestments, asset allocation, and risk management.■ Ten-year history of pension fund accumulated assets, as well as pension fundUAAL, funded ratios, sponsor contributions, employee contributions, andinvestment performance.■ Five-year trend of investment allocation.■ Description of pension plan benefits and changes (if any) over the past fiveyears, plus statutes governing benefit changes.■ Authorizing legislation permitting the extension of guarantees by the pensionfund, including any limit on the types or amounts of permissible guarantees.■ Specific terms and documentation of the credit enhancement program(or related guarantee) and capital call requirements, if any.■ Description of the priority of debt guarantees vis-à-vis pension benefit obligations.■ Legal opinions on validity and enforceability of pension fund guarantees.■ List of current obligations guaranteed by pension fund and a description ofproposed and/or future debt obligations that may be considered forfuture guarantees.■ Current and historical, legally available liquid asset balances that arededicated to the existing or proposed credit enhancement program,as well as monitoring procedures.■ Detailed credit enhancement program asset liquidation plan.■ Monthly cash flow statements.resulting in decreased liquidity, reduced flexibilityin terms of covering pension payments, andincreased dependence on the government sponsorfor higher contributions. In analyzing investmentincome and performance, focus will be placed onhow much investment income derives from actualcash payments (such as interest, dividends, andrental income) as opposed to investment incomegenerated from capital appreciation.Standard & Poor’s evaluates various performancemetrics in order to assess operating efficiency andasset maximization. Standard & Poor’s employsperformance ratios such as return on assets, returnon net assets, and total margin. These metrics areuseful in providing insight as to how effectively thepension fund is able to augment its operatingincome and leverage its asset base. Standard &Poor’s also uses a service delivery efficiency ratiothat looks at what percentage of total annual pensionfund expenses are specifically for retirementbenefits. Consistently maintaining a very high servicedelivery ratio (one that approaches 100%) overtime is a credit strength. Conversely, in cases whereadministrative or other expenses consistently comprisea larger share of operating expenses, or wherethere is tremendous fluctuation in service deliveryrequirements, suggest credit weakness.Standard & Poor’s conducts a historical analysisof the makeup of the fund’s balance sheet andincome statement. Specifically, Standard & Poor’swill seek to understand and annually compare thecomposition and movement of the fund’s assets andliabilities in relation to their respective total bases.Finally, Standard & Poor’s assesses the pensionfund in relation to the government sponsor in orderto determine how material the pension fund’s operationsand liabilities are to the sponsor. Standard &Poor’s will look at the sponsor’s annual pensioncontribution relative to its own budget, which willreveal the level of financial resources needed to regularlysupport the pension fund, and is analogous toa debt service carrying charge calculation regularlyconducted for general debt credit analysis. A calculationof the UAAL relative to the sponsor’s operatingbudget will be an important indicator as to thesignificance and rate of change of the unfunded liability.Similarly, the unfunded pension liability willbe analyzed in terms of UAAL per capita (using thegovernment sponsor’s population) and UAAL as ashare of per capita income (using the per capitaincome of the government sponsor’s population).Although pension fund liabilities are not generallyconsidered to be “hard” debt, they are considered tobe debt-like in nature, and it is useful to make pensionfund burden comparisons that are similar innature to general credit debt burden ratios. ■334 Standard & Poor’s Public Finance Criteria 2007