The Rating Outlook is Stable.
CalPERS' CEP provides letters of credit (LOCs) and standby bond purchase agreements (SBPAs) for municipal issuers. CalPERS is unconditionally obligated to provide liquidity/credit enhancement from available short- or long-term assets.
KEY RATING DRIVERS
LOW-RISK CEP PROFILE: CalPERS' CEP obligors include high-quality credits in
HIGH LIQUIDITY CUSHION: Fund assets cover the maximum CEP exposure by a wide margin, even with significant discounting of assets. The 'F1+' short-term rating reflects the availability of highly liquid assets that could immediately cover draws on the program.
PENSION FUNDING REMAINS ADEQUATE: The overall funded status of the pension fund is considered adequate, even after applying Fitch's more conservative discount rates and assessment of fund asset value.
SHORT DURATION LIMITS SPONSOR IMPACT: While the credit quality of the state (
FUND INDEPENDENCE A STRENGTH: The statutory framework and legal rulings, which give CalPERS the power to raise contribution rates, enhance the likelihood of continued adequate pension funding.
STRONG LIQUIDITY ESSENTIAL: Maintenance of a strong liquid cushion over potential CEP liabilities and benefit payouts is critical to maintaining the current rating level.
FUND PERFORMANCE CRITICAL: Declines in the pension fund's overall funding level and/or rising fund payouts that outpace inflows could erode credit quality.
SUCCESSFUL CHALLENGE TO PENSION CLAIMS: A successful challenge by any CalPERS' members in bankruptcy court that allows for a reduction in payments to CalPERS could have negative implications to the credit quality of the CEP. Nevertheless, CalPERS' ability to equally reduce benefit payouts to a member's beneficiaries and to beneficiaries of any other agency that fails to make its contribution is likely to offset any concern.
CalPERS' CEP currently generates additional income for the pension system by providing a total of
FACTORS CONSIDERED IN ANALYSIS
Fitch's evaluation of CEP programs considers five broad areas: the CEP's risk profile, available liquidity, the financial condition of the pension system, sponsor quality, and management. Fitch does not rate the retirement system.
CEP RISK PROFILE
Fitch evaluates the overall operations of the CEP to determine potential exposure the CEP may face with regard to obligors to whom it has extended LOCs or SBPAs. This includes an assessment of obligor credit quality and diversification of obligors.
The CEP's maintenance of prudent underwriting guidelines and funding procedures minimizes program risk. While the guidelines require that an average obligor credit quality rating of 'A' be maintained, approximately half of the current commitments are to obligors rated at least 'AA' or higher.
Obligor pledges are also strong, as approximately 82% of the enhanced credits have tax-supported or water/wastewater utility pledges. Currently, the longest CEP obligation matures in 2016; this is well within the program's required five-year weighted average maturity. Detailed funding procedures are also maintained specifying the timing and the funds from which monies would be tapped to satisfy a draw.
The CEP maintains prudent policies and procedures that minimize risk. Like most LOC and SBPA providers, the CEP had some draws in 2008 and 2009, which until that time had been virtually unprecedented for municipal obligations. An increase in liquidity draws represents greater risk on the CEP. In 2008 and 2009, there were 43 liquidity draws on the CEP, representing seven of the program's then 15 issuers.
These draws totaled
The CEP is an off-balance-sheet component of CalPERS investment portfolio. Program commitments are accounted for as contingent liabilities. Management does not rank the priority of the program's commitment draws for making beneficiary payouts, as it is CalPERS expressed intent to fully meet every obligation in a timely manner.
Fitch also considers the liquidity available to meet CEP obligations. This analysis includes a comparison of the fund's liquid assets available to pay potential CEP liabilities and near-term obligations, as well as any discounting of available assets for potential timing delay.
Within this portfolio, management maintains an abundance of cash and high-quality fixed income investments to fund any draws under the CEP at the maximum
PENSION SYSTEM FINANCIAL CONDITION
Fitch evaluates the pension fund's overall health. In assessing the pension fund, Fitch considers the funding progress of accrued liabilities, the discount rate and the fund's investment strategy.
As of the latest actuarial valuation (
SPONSOR CREDIT QUALITY
Fitch considers the sponsors' credit quality, given that pension funds face the risk that sponsor payments may be delayed during periods of financial stress.
Exposure to the state's below-average credit quality is of some concern. However, Fitch believes the short duration of the CEP relative to the life of the pension liabilities, the liquidity of the CEP and the current adequate funding level of the pension fund sufficiently mitigate this concern. As of
Fitch also considers the management of the CEP, which includes an assessment of policies and procedures, as well as the independence of the pension fund's governing body and statutory framework of the fund itself.
By law, employers must fund their annually required contributions at 100% and CalPERS has the authority to increase the funding requirement from employers to make up any contribution shortfalls. This power to raise contribution rates enhances management's ability to maintain full funding of pension liabilities. In addition, CalPERS sets all other policies for its system and has sole investing power, except for specific investments prohibited by the state legislature.
Uncertainty exists regarding the outcome of ongoing bankruptcy proceedings relating to the cities of
However, if a member were to reduce its payments it is expected that CalPERS would reduce member benefits for that entity by the same amount; state law prohibits the use of CalPERS' assets to fund benefits of non-participating agencies. Consequently, Fitch believes there is a small likelihood that any reduction of payments alone would weaken CalPERS' funding status or liquidity.
Additional information is available at 'www.fitchratings.com'.
--'Revenue-Supported Rating Criteria' (
--'Closed End Fund Debt and Preferred Stock' (
--'Rating U.S. Public Finance Short-Term Debt' (
Revenue-Supported Rating Criteria
Rating Closed-End Fund Debt and Preferred Stock
Rating U.S. Public Finance Short-Term Debt
Source: Fitch Ratings
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