US - Fitch Ratings has downgraded the rating assigned to the Credit Enhancement Programme (CEP) sponsored by the California State Teachers Retirement System (CalSTRS) to AA+ from AAA.
The rating agency said its decision reflected the steep decline in CalSTRS funding ratio due to investment losses, coupled with the fact that contribution rates are set not by CalSTRS - but by the state legislature - and are not likely to rise in the near future.
The CEP is a fee-based programme CalSTRS initiated several years ago, through which the fund enables the issuers of municipal debt to substitute their lower credit rating for CalSTRS' higher credit rating.
CalSTRS' investments declined by US$42.6bn (26.4%) to $118.8bn during the fiscal year ending June 30, 2009. This followed a $10.4bn (6.1%) decline in fiscal 2008.
As a result, the agency said, CalSTRS' unfunded actuarial obligation within its defined benefits programme has increased from $20.7bn at June 30, 2007 to approximately $45bn at June 30, 2009.
This has resulted in an estimated funding ratio of 76% on an actuarial basis, but only about 60% on a market value basis, as of June 30, 2009.
In addition, Fitch said the current harsh economic conditions and the fiscal problems facing California made it "politically difficult and unlikely" that contribution rates would be increased in the next couple of years, but expected steps would be taken to maintain CalSTRS' fiscal soundness.
According to the agency, CEP had outstanding commitments in the form of letters of credit (LOCs) and standby bond purchase agreements (SBPAs) on about $2.6bn of municipal obligations as of June 30, 2009.
Fitch added the reported $27bn in securities lending, as well as $1.5bn in reverse repos reported by CalSTRS in its fiscal 2008 financial statement represented additional potential calls on its capital.
However, it concluded CalSTRS had abundant cash reserves and established procedures to liquidate its high quality fixed income investments, providing confidence that liquidity draws and all other calls on its capital would be met on a timely basis.
CalSTRS could not be immediately reached for comment.
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