LOS ANGELES — Fitch Ratings analysts said Tuesday that while a decision by the California Public Employees’ Retirement System to lower its earnings forecast to 7.5% from 7.75% is positive for local government credit quality in the long term, it means added near-term budgetary pressure for struggling municipalities.
The CalPERS board’s decision on March 15 to reduce expected average annual returns on its investments comes at a time when several counties and cities have suffered tax-base stagnation and have little financial flexibility, Fitch said.
The change means CalPERS’ members, including the state and local governments and agencies, will have to make up the difference by paying more into the system.
“We believe that this reduction presents the biggest risk to municipalities and counties with the least overall financial flexibility and strained relationships with their work forces,” Fitch said. “Municipalities with significant financial flexibility and cooperative relationships with bargaining units are likely to take this increased pressure in stride.”
Local governments have taken steps to reduce labor costs, which represent the largest budget item for most, through furloughs, wage freezes, and layoffs,
and they may have little flexibility for further cuts. The changes, which take effect for the state and school districts on July 1, are expected to cost California $303 million a year, including $167
million from the general fund. The financial impact on hundreds of counties and cities, which will experience increases starting July 1, 2013, has not been calculated.
Fitch said it will continue to monitor the downstream budget impacts on a state-by-state basis, because similar steps are being taken in several other states.