Brown Signs California Pension Reform Bill

SAN FRANCISCO — California Gov. Jerry Brown signed a pension reform bill into law Wedneday, saying it will help ease the burden of rising retirement costs on the state and local governments over the long term.

“We’re lowering benefits to what they were before I was governor,” Brown said in a statement. “Under the new rules, employers and employees alike are going to contribute their fair share of the costs, resulting in a more sustainable system.”

The announcement came as no surprise as the pension bill, passed at the end of August, came out of an agreement between the Democratic governor and leaders of the Democratic majorities in the Legislature.

On Monday, Moody’s Investors Service said in a note that the pension reform legislation is a positive for the state’s credit.

The rating agency cited the California Public Employees’ 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.

Analysts from Standard & Poor’s and Fitch Ratings have also said in interviews with The Bond Buyer that the bill is a step in the right direction, though the savings are mostly on the long end and there are many uncertainties about the implementation of the law.

AB 340 caps benefits for future hires, increases retirement ages, rolls 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 all general-law local governments. They exclude the University of California System and charter cities and counties with retirement systems outside of the state programs.

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