PHOENIX - A California appeals court's ruling upholding Marin County's pension changes is a positive development for the credit of not only the county, but also California and its other local governments, Moody's Investors Service said Thursday.

The state's First District Court of Appeal on Aug. 17 rejected the rigid interpretation of the so-called "California Rule", ruling that although an employee has a vested right to a pension, their only right is to a "reasonable pension," one without benefit spiking. California courts has previously typically interpreted the state constitution to mean that pension benefit arrangements of current employees can't be modified, but the First District Court held that the pension system's move to stop using certain types of pay to calculate retirement benefits to be legal, even though the action applied to current employees.

"The ruling is a positive credit development not only for Marin County, but the State of California and its local governments," Moody's said. "By allowing prospective changes to at least one component of current employees' pension benefit formulas to stand, the Court of Appeal's ruling signals a potentially material increase in legal flexibility related to public pensions in California."

A ruling against the he Marin County Employees' Retirement Association (MCERA) stood to cost the pension system some portion of the $49 million it has realized in actuarial savings due to salary growth below assumed levels. The ruling was hailed by pension reformers, including former San Jose mayor Chuck Reed. The employee groups may still appeal to the state Supreme Court, which originated the strict "California Rule" interpretation of the constitution in 1955.

"If the ruling is not appealed, or is upheld upon appeal, the extent to which it may eventually allow changes to the 'California Rule' remains uncertain," Moody's said. "The ruling found that until employees actually retire, governments may enact 'reasonable' modifications to their pension benefit formulas, and the court in this instance concluded the changes enacted by MCERA met this requirement. If challenged, future courts may view broader changes applied to prospective benefit accruals less favorably using this test."

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