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Spokane, Washington  Est. May 19, 1883

‘Flawed’ pension report should get an obscenity rating

The newly enacted financial reform bill does not break the tyranny of the credit-rating agencies, despite a last-minute plea by Washington state Treasurer James McIntire to the chairman of the Senate banking committee.

Along with the plea: Exhibit A regarding carelessness that might injure perfectly good credit, whether that of an individual, a business or a state.

McIntire’s entreaty to Sen. Chris Dodd, D-Conn., was prompted by a June 30 Standard & Poor’s assessment of state pension plan funding. The recession and the crashing value of financial assets has whacked those plans and created, as the S&P analysis put it, “funding and policy challenges” for hard-pressed states.

Washington, according to S&P, would have been among those with a serious problem; the state’s 13 separate plans were only 73 percent funded. That put Washington 38th among the states for pension plan funding. Idaho, with its plans 93 percent funded, was eighth.

Making up pension arrears can cost taxpayers dearly and cost states a good credit rating.

But S&P had not considered all Washington plans. Instead, the agency had looked only at two plans closed to state employees since 1977, when officials realized the potential obligations were out of control.

Washington plans as a whole are 100 percent funded, with surpluses in some accounts offsetting the deficits in the two older plans. Those surpluses, however, cannot be reallocated to the problem accounts.

McIntire said Washington should rank fourth, not 38th.

He brought the error in the S&P findings to the agency’s attention almost immediately. Its analysts acknowledged the mistake. But the report was not corrected until he wrote agency President Deven Sharma on July 7.

“The State of Washington’s reputation in the markets could be irreparably harmed if your flawed report stays in the public eye,” he wrote. “As a credit rating agency, you are responsible for assessing the state’s reputation in the financial markets, not destroying it!”

A corrected report was released the next day.

Almost corrected, that is.

By excluding what it said were “specialized funds,” S&P came up with a revised analysis that Washington plans are 88 percent funded.

“We are dissatisfied with the new report as well,” said McIntire spokesman Chris McGann.

But rather than continue to argue the point, he said, the state will await the ratings on a pending sale of $716 million in bonds later this month.

The rankings by S&P, Moody’s Investor Services and Fitch will help determine how low an interest rate bond buyers might accept in return for the high probability Washington will meet its obligations. The state pays these agencies for their services, a combined $1.2 million for 2009-’10.

And pay it must, because of rules dating to the 1930s that prohibit many institutional investors from buying securities not rated by one of these three “nationally recognized ratings organizations.” Recognized, all right; most recently for their utter incompetence when giving some of the worst junk ever devised on Wall Street AAA ratings.

An office of credit ratings was proposed in the reform to take away some of their power. McIntire told Dodd he supported the provision. It was far from perfect, but it was dumped in the final bill in favor of a study, Congress’ way of kicking a problem down the road.

So we are stuck with the agencies and, as McIntire informed Dodd, another bill as well.

On the day S&P released its study, they handed his office a proposed 17 percent increase in fees.

It’s good to be king.