BRADENTON, Fla. - Moody’s Investors Service said Monday that a lawsuit challenging Atlanta’s two-year-old pension reform is a credit negative because of the uncertainty it creates.

Police, fire, and employee unions filed the suit in Fulton County Superior Court Nov. 14 arguing that a portion of the 2011 reform plan is unconstitutional because it increases employee pension contributions by 5%, and provides for that rate to increase if the city’s required contribution exceeds 35% of total payroll.

“The outcome of the lawsuit cannot be predicted, but the related uncertainty it creates is credit negative,” said Moody’s analysts. “Moreover, the city would lose cost savings of about 4% of its general fund budget.”

In response to the suit, the city said in a statement that it conducted extensive research on every element of the current pension plan, and worked collaboratively with employees and their unions prior to its June 2011 passage.

“The final legislation was endorsed at the time by all unions representing city of Atlanta employees,” the city said. “We remain confident that the Court will uphold the city’s current pension plan.”

Atlanta instituted pension reforms to improve lagging finances. The city’s general fund reserves were only 1.6% of general fund revenues in fiscal 2009. Since the pension reforms and other measure were implemented, reserves have improved to 24.2% of general fund revenues in fiscal 2012, Moody’s said.

“City unions initially supported the changes instead of suffering layoffs and other significant budget cuts that would have been needed if the pension changes were not instituted,” said analysts. “Their reversal highlights the difficulty of maintaining pension reform.”

Atlanta’s pension reforms included establishing a defined contribution plan for all future employees. Current employees could keep their existing defined benefit plan but increase their annual contributions by 5%, or they could join the newly created defined-contribution plan.

The union lawsuit contends that these changes violate their labor contracts, according to Moody’s.

“Switching to the [defined-contribution] plan and changing pension funding assumptions saved the city $20 million in fiscal 2012, or 4% of expenditures,” analysts said. “These savings could be wiped out if the suit prevails.”

Pension reform was a major reason Moody’s and Standard & Poor’s revised their outlooks on the Atlanta’s Aa2 and A general obligation ratings to stable from negative last year. At the end of fiscal 2012, the city had about $245 million in outstanding GOs.

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