This week's pension reform ruling in Los Angeles provides the latest example of the challenges local governments face in effecting pension reform, Fitch Ratings says.
The agency believes this challenge is unusual as it concerns reform that only applies to new employees. Los Angeles' Employee Relations Board ordered the city council to rescind a 2012 pension reform that scaled back pension benefits for new employees of the Coalition of Los Angeles City Unions.
Legal challenges have been a frequent companion to pension reform efforts for some time and are unlikely to abate soon. Economic pressures have sensitized the electorate, officials, and employees to the costs of pension benefits and the potential relief possible with pension reforms.
However, legal constraints and current and future beneficiary resistance favor preservation of current benefit levels. These issues are being considered by internal review bodies, courts and, at times, voter initiatives. Recent San Jose and San Diego cases were voter-driven and affected both existing employees and new employees. Neither case has reached final resolution.
Fitch considers the ability to adjust pension benefits for future employees to be critical to Los Angeles' financial flexibility. The agency believes Los Angeles will eventually be able to implement this reform, either through a judicial ruling or the meet and confer process.
Similar reform has already been implemented for police, fire, and Department of Water and Power unions. This tentative decision will likely be finalized by the board next month and Fitch expects the city to appeal the decision to the state court. Savings from the L.A. pension reform are estimated at approximately $4.3 billion over 30 years, beginning at close to $4 million in the first two years.
