SAN FRANCISCO — Voter-approved pension reform measures in San Francisco and Modesto could signal a sea change in efforts by California cities to contain rising unfunded liabilities, according to Fitch Ratings.
“Fitch Ratings views the measures, while very limited in scope and financial impact, as potentially significant if broader pension reform moves continue to gain support from voters across the state,” the agency said in a note released Wednesday.
Fitch said the success of the two measures may pave the way for similar initiatives in San Jose and San Diego next year.
Generous pension benefits locked into public employee union contracts coupled with weak investment returns and declining interest rates have expanded local governments’ unfunded pension deficits in California and across the country, Fitch said.
Last week, San Francisco voters approved Proposition C to create a less expensive pension plan for newly hired employees. However, they shot down a stronger measure that would have instituted cuts to current employees’ pension benefits.
“The cash-saving impact of the measure over the short term will therefore be small and unlikely to alter the city’s budget outlook,” Fitch said.
Mayor Ed Lee, along with city insiders and union leaders, championed the successful proposition, while proponents also vilified the competing and more far-reaching pension reform measure pushed by the city’s public defender, Jeff Adachi.
San Francisco, the state’s fourth-largest city, had $1.6 billion of unfunded liabilities on an actuarial basis and $4.5 billion on a market valuation basis as of the end of fiscal 2010.
Its general fund pension payments are expected to rise to $434 million, or 77%, in fiscal 2016 from $245 million in fiscal 2012, according to Fitch.
In Modesto, California’s 18th-largest city, voters approved a nonbinding overhaul of city workers’ pensions.
The Fitch report also mentioned Los Angeles’ effort to rein in pension costs. In March, the city carved out a plan with public unions to raise employee contributions for both pension and health care plans.
Los Angeles’ unfunded pension liabilities were $4.3 billion on an actuarial basis and $8.9 billion on a market basis, Fitch said.
California also may get involved. Gov. Jerry Brown earlier this month proposed a plan to help curb pension costs for both the state and local governments.