Rating Action: Moody's affirms CalSTRS' issuer ratings
Global Credit Research - 22 Dec 2020
Baseline credit assessment is downgraded to ba3
New York, December 22, 2020 -- Moody's Investors Service, ("Moody's") affirmed California State Teachers' Retirement System's (CalSTRS) Aa3 long-term issuer rating and P-1 short-term rating. The rating outlook remains stable. At the same time Moody's downgraded CalSTRS' Baseline Credit Assessment (BCA) to ba3, reflecting a weakening of the State Teacher Retirement Plan's (STRP) funded status on a market valued basis.
Under Moody's Government Related Issuers methodology as it applies to public pension managers, recognition is given to CalSTRS' very high dependence on, and support from, its sponsor, the State of California (long-term senior general obligation rating: Aa2 stable). Under Moody's rating methodology for Public Pension Managers a BCA is assigned to CalSTRS, reflecting its intrinsic credit strengths.
Moody's also affirmed the A1 rating with a stable outlook on the California Infrastructure and Economic Development Bank Lease Revenue Bonds, (California State Teachers' Retirement System Headquarters Expansion) Series 2019 (Green Bonds - Climate Bond Certified) ("2019 Lease Revenue Bonds").
The following rating actions were taken:
.California State Teachers' Retirement System
..Affirmations
Long-term Issuer Rating, affirmed at Aa3
Short-term Issuer Rating, affirmed at P-1
..Downgrade
Baseline Credit Assessment, downgraded to ba3
..Outlook remains stable
.California Infrastructure and Economic Development Bank
..Affirmation
The California Infrastructure and Economic Development Bank Lease Revenue Bonds, (California State Teachers' Retirement System Headquarters Expansion) Series 2019 (Green Bonds - Climate Bond Certified), affirmed at A1
RATINGS RATIONALE
The affirmation of CalSTRS' long-term issuer rating one notch below the State of California's rating of Aa2 reflects our view that ongoing weakness in the pension system's funding status positions creditors in a modestly weaker position than the state's general obligation creditors.
Despite economic stresses arising from the COVID-19 pandemic, the outlook for the state remains stable, which supports CalSTRS' long-term issuer rating. CalSTRS' issuer rating is highly dependent on the state, given its underfunded status. .
The key driver of the BCA downgrade to ba3 is a weakening of CalSTRS funding status, which Moody's measures employing market rate adjustments to CalSTRS' published Total Pension Liability. As of June 2020, the STRP's fiduciary net position as a percent of the total pension liability was 71.8% under actuarial assumptions, including an investment rate of return of 7.1%, gross of administrative expenses. Under Moody's alternative approach, the fiduciary net position as a percent of the adjusted pension liability was just 39.3%, using a pension liability index rate of 2.7% to discount pension liabilities. Using Moody's adjustments, CalSTRS' adjusted net pension liability (ANPL) is approximately four times greater than CalSTRS' reported net pension liability of $96.9 billion.
CalSTRS' Funding Plan, enacted by the state legislature in 2014 (Assembly Bill 1469), established a program for increasing contributions to the pension system to achieve a fully funded status in 2046. Currently, projected contributions are derived from a 7% investment return assumption (net of administrative expenses), which reflects historical asset performance. This may be an aggressive hurdle, given high global asset valuations and low yields, and CalSTRS' own efforts to mitigate asset risk. In fiscal year 2020, the STRP's time-weighted investment return was 3.9% (net of fees).
Under the Funding Plan, shortfalls in investment performance will be made up by increased contributions mostly from the state. In 2020, budgetary stress arising from the COVID-19 pandemic caused the State of California to enact mandatory state-wide reductions to administrative expenditures across all departments. CalSTRS operating budget declined to $355.9 million from $364.6 million. CalSTRS' board's limited rate-setting authority for the state contribution rate was suspended for one year, saving the state an estimated $169 million in 2020-21. However, the state has transferred $297 million of California Proposition 2 funds to CalSTRS.
Under Moody's revised rating methodology for Government-Related Issuers (GRIs), public pension plans are assessed for their dependency on a supporting government entity, as well as that entity's ability and willingness to provide credit support to the GRI. We continue to believe that California will have the capacity and willingness to provide extraordinary support to CalSTRS. Moody's has noted the continued expansion of "the state's massive, diverse and dynamic economy and corresponding growth in revenue" as bases of support.
The A1 rating assigned to the 2019 Lease Revenue Bonds is one-notch below CalSTRS' Aa3 issuer rating. Under our methodology for rating Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments, lease-backed obligations for more essential assets that are subject to abatement risk are generally rated one-notch below the issuer's issuer rating.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
CalSTRS' ratings could be raised if the following were to occur:
1. An increase in the pension fund's funded status ahead of Funding Plan expectations, due to favorable actuarial developments, or strong investment performance.
2. A clear, sustainable priority of claim were enacted to the benefit of the pension plan's creditors.
CalSTRS' ratings could be lowered if the following were to occur:
1. A deterioration in the State of California's credit profile
2. A decline in the pension fund's funded status due to an inability to sustain contributions, unfavorable actuarial developments, or poor investment performance.
3. A significant increase in financial leverage or deterioration in portfolio asset quality
CalSTRS is the pension plan for California's public-school educators. The organization, headquartered in West Sacramento, represents nearly one million active and retired educators and their beneficiaries. As of June 30, 2020, CalSTRS' defined benefit program' fiduciary net position was $247.0 billion, and it employed a staff of approximately 1,200.
The methodologies used in these ratings were Public Pension Managers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1169709, Government-Related Issuers Methodology published in February 2020 published in and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207, and Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published on July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1102364. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Neal M. Epstein, CFA VP - Senior Credit Officer Funds & Asset Management Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Robert M. Callagy Senior Vice President Funds & Asset Management Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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