California Pensions Upgraded by Moody’s on Funding Plan

California’s fiscal comeback is lifting prospects for its two pension funds, the largest in the U.S., to meet long-term obligations to retirees, Moody’s Investors Service said in upgrading the issuer ratings of both.

Moody’s boosted the California Public Employees’ Retirement System and the California State Teachers’ Retirement System to Aa2, its third-highest grade, from Aa3, the ratings company said. The two pension funds have a combined market value of almost $500 billion, according to their websites.

Moody’s action came two weeks after the ratings company upgraded California’s general-obligation grade to Aa3, citing the state’s “rapidly improving” fiscal condition and comparatively modest pension obligations. The state’s improving prospects, along with actions to force cities, school districts and other public employers to contribute more toward employee retirements, account for the pension funds’ higher grades, Moody’s analysts led by Robert Callagy wrote.

“While each retirement system is legally autonomous and independent from the state of California, the state of California maintains significant influence over both retirement systems,” the analysts wrote. “As such, Moody’s issuer ratings on Calpers and Calstrs align closely with the state’s long-term rating (Aa3 stable). The alignment reflects the plans’ heavy reliance on state contributions either directly or indirectly to fund retirement benefits, as well as the likelihood that the state would face strong political pressure to cover enduring funding gaps in the plans.”

Governor Jerry Brown last month signed a bill to close the $74 billion funding gap in the teachers’ pension system over 32 years by requiring higher payments by teachers, school districts and the state. The Calpers board, which can increase contributions without legislative approval, in April voted for higher contribution rates by both the state and school districts.

Moody’s downgraded both California pension plans in December 2009 on investment losses and financial strains faced by the state government.

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