The National Association of State Retirement Administrators hassent a letter to Moody’s Investor Service expressing “deep concern”about the methods used by the ratings agency to estimate theunfunded liabilities of the nation’s public funds.

“The report is not, as the title and description of the reportimply, a depiction of the actual financial condition of state andlocal pension plans,” wrote Keith Brainard, the research directorfor the organization.

NASRA claims Moody’s recently published report did not accountfor the drag of low interest rates on fund performance and failedto use inflation-adjusted dollars to assess current liabilities.

“The report’s failure to clarify the limited context of Moody’scalculations results in a picture of the state of public pensionsthat is unrealistic, misleading and confusing,” Brainardwrote.

In its report — “U.S. State and Local Government Pensions LoseGround Despite Meeting Return Targets” — Moody’s says the 25largest public pensions face roughly $2 trillion in unfundedliabilities.

On average, those funds returned 7.45 percent from 2004 to 2013,nearly reaching the expected rate of return of 7.65 percent. ButMoody’s also claimed that liabilities tripled in the sametime.

The growth in liabilities has been due to “inadequate pensioncontributions, stemming from a variety of actuarial and fundingpractices, as well as the sheer growth of pension liabilities asbenefit accruals accelerate with the passage of time, salaryincreases and additional years of service,” it said in itsreport.

In the letter sent to Moody’s, NASRA claims Moody’smisrepresented the facts in coming to its conclusions.

Low interest rates have limited investment returns, a fact NASRAfeels the report was wrong to omit.

Nor does the report clarify that its conclusions do notrepresent funding mandates, potentially confusing investors,according to the letter.

NASRA also claims that Moody’s failed tomeasure inflation in its estimates of liabilities. Had it done so,NASRA claims Moody’s would have found that liabilities haveactually been reduced by 20 percent from 10 years ago.

It also took issue with how Moody’s benchmarks returns inperiods where the report claims the funds lagged, claiming theratings agency misleadingly measures the funds against S&Pindex returns.

“Public plans, like other diversified investors, do not use asingle asset class, such as the S&P, as a benchmark for theentire portfolio,” the letter said.

Elsewhere, Moody’s was critical of pension funds use ofalternative investments, accusing them of assuming too much risk indoing so.

NASRA took issue with that, too. “The report does not includethe fact that these allocations are also part of an effort todiversify and lower risk,” it said.

NASRA claims that in its criticism of alternative assets,Moody’s fails to differentiate private equity from hedge funds andother alternatives.

“Private equity, the primary type of alternative investment, hasbeen the highest performing asset class for most public pensionfunds the last decade,” said NASRA.

The Moody’s report even fails to give an accurate accounting oftotal state and local pension assets, according to theletter.

Moody’s published those assets as being $5.29 trillion.According to NASRA, the Federal Reserve calculated total fundassets to by $3.7 trillion as of June 2013.

“The report perpetuates the very type of confusion thatstakeholders urged Moody’s to avoid,” said the letter.

NASRA said it hopes that future Moody’s reports will demonstrate“a better command of the relevant facts.”