SAN FRANCISCO — Moody’s Investors Service said Monday that California’s recently passed pension reform legislation is a positive for the state’s credit.
The rating agency cited the California Public Employee’s Retirement System’s initial estimate that the pension changes may save the state and its local governments between $12 billion and $15 billion on a present-value basis, or between $42 billion and $55 billion on a nominal basis, over the next 30 years.
However, Moody’s said the number is not very large when compared to the unfunded liability of the plan, reported to be $51 billion based on a 2010 actuarial valuation, and only 3% of the projected savings will happen over the next five fiscal years.
“What is significant, however, is that the state is taking a step to reduce the large and growing costs to the state and local governments,” Moody’s said in the note. “Such savings are credit-positive for both the state and local governments that participate in the state’s cost-sharing pension plan.”
Moody’s rates California A1 with a stable outlook.
Schools would save 19% due to the pension legislation and local governments would save 58%, while the remaining 23% would benefit the state, according to CalPERS initial estimates.
“However, because the reform legislation primarily affects newly hired rather than current employees, the greatest benefit for local governments is likely to be from the pressure these reforms create in labor negotiations,” Moody’s said.
On Aug. 31, the last day of the legislative session, lawmakers passed AB 340, implementing the pension reform agreement announced earlier in the week between the leadership of the Legislature’s Democratic majorities and Gov. Jerry Brown, also a Democrat.
For future hires, the reforms cap benefits, increase retirement ages, roll back formulas used to calculate pensions, and require employees to pay at least half of the normal cost of the pension.
Additionally, current employees would have to pay at least half of the costs, a provision to be negotiated through collective bargaining or be imposed after five years.
The reforms will also apply to general-law local governments. They exclude the University of California System, charter governments and all retirement systems outside of the state programs.
Brown has until Sept. 30 to sign the bill. He is expected to do so.
