330 Standard & Poor’s Public Finance Criteria 2007
Analytical evaluation
Standard & Poor’s analytical approach to public
pension fund ratings begins with determining the
government sponsor’s general creditworthiness,
which includes examining the sponsor’s pension con-
tribution history. In evaluating the sponsor’s credit-
worthiness, that is, its ability to continue to make
pension contributions in the context of its other
financial obligations and commitments, considera-
tion will be given to the strength and priority of
required contributions relative to other financial obli-
gations of the government sponsor. Standard &
Poor’s will determine if the sponsor’s pension contri-
butions are discretionary or constitutionally protect-
ed, or, if there is a legal priority for pension contribu-
tions relative to other financial commitments.
Standard & Poor’s will also examine the sponsor’s
funding objectives, along with the sponsor’s willing-
ness and ability to cure funding deficits. Moreover,
Standard & Poor’s will calculate how significant the
pension funding requirements and liabilities are rela-
tive to the sponsor’s operating budget.
Public pension funds are typically single-employ-
er defined benefit plans, or multiple-employer
(agent or cost-sharing) defined benefit plans spon-
sored by state or local governments. In multiple-
employer plans, the pension fund receives contribu-
tions from a number of governments and their
employees. A government that is the sole sponsor
for the public pension fund may provide several
separate plans for different classes or types of
employees. Funding levels and requirements may
vary, so it would not be accurate to assume one
plan’s creditworthiness could serve as a proxy for
another plan funded by the same sponsor.
Multiple-employer pension plans may or may not
include state funding participation. To assess the
creditworthiness of the government sponsor where
there is no state participation, a portfolio analysis
of the credit characteristics of the local government
participants is necessary. Where a multiple-employ-
er plan includes both state and local government
employees and funding requirements, such as a
cost-sharing plan, the state’s credit rating will be
significantly weighted—under a multiple-employer
cost-sharing program, the state is typically the
largest employer and contributor, therefore making
the plan substantially dependent on the state’s cred-
itworthiness for its ongoing solvency.
For multiple-employer teachers’ retirement sys-
tems, with or without state-required funding of
contributions, the state’s general credit rating may
still be viewed as a proxy for the underlying credit-
worthiness of the governmental sponsors, since
states traditionally provide substantial funding
resources to local school districts for educationalexpenses, and teachers’ salaries and other compen-
sation are usually the largest component of school
district spending.
The ability of the public pension fund to exceed
the sponsor’s general credit rating by up to one full
rating category will hinge on the strength of the
fund’s three remaining basic analytical areas.Pension Fund Independence
Standard & Poor’s considers independence as being
an essential factor in deciding whether the pension
fund’s credit rating can exceed that of its sponsor.
The assessment of independence is largely qualita-
tive in nature and includes a thorough documenta-
tion analysis and a meeting with fund officials.
Issues to consider include:
■Are pension board directors appointed independ-
ently, with staggered terms, or do they serve at
the pleasure of the government sponsor?
■Are operating and/or investment decisions vested
solely in the management of the pension fund, or
are they influenced or determined by the govern-
ment sponsor’s representatives?
■Are contribution rates determined independently,
based on actuarial needs, or are they merely a
function of the sponsor’s annual budget process,
subject to the sponsor’s financial condition on a
year-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 deter-
mine pension-funding levels be influenced or
revised?
Despite the inherent connection between pension
fund and sponsor, the degree to which a pension
fund can demonstrate that its managerial structure
and operations are independent of sponsor control
and influence is a credit factor. Although the spon-
sor typically sets the retirement benefits promised
to employees, many pension funds are designed to
retain significant autonomy in direct management
and operating areas.
In general, credit strength will be accorded to a
pension fund where it can be verified that the fund
can operate independently of its sponsor in the fol-
lowing areas:
■Legal authority: the basis for the establishment,
organization, and operation of the pension fund;
■Management: the basis for election or appoint-
ment of those charged with responsibility for
pension fund administration;
■Policy making authority: investment guidelines,
asset allocation, and risk management, and, over-
all control of asset portfolio;Other Criteria