Rating agencies weigh in on California Supreme Court pension ruling

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Two rating agencies weighed in on a recent California Supreme Court ruling in a pension reform case that could have had wider ramifications for a series of pension rulings, commonly referred to as the "California Rule," which has created ironclad protections for government worker pensions.

While Fitch Ratings said the ruling had no impact on its state and local government ratings, Moody’s Investors Service analysts called it a credit positive in an Aug. 5 report, because it “upholds certain pension changes yet maintains protections.”

The high court failed to take up the California Rule in its most recent decision handed down July 25 in a pension case, instead issuing a narrow ruling on the case’s merits. The court did affirm the state’s right to eliminate "pension spiking," a reform outlined in the Public Employees’ Pension Reform Act of 2013, a law championed by former Gov. Jerry Brown.

The opinion focused on the specific merits of the 2012 lawsuit filed by the Alameda County Sheriff’s Association.

The justices affirmed the 2013 law prohibiting pension spiking, a practice that enabled public workers to bulk up overtime hours or cash out accumulated leave at the end of their careers to inflate their pensions in retirement. Pensions in California are based on salary levels achieved in the final years before retirement.

The ruling came as the second of several cases that could weaken or solidify the status of the California Rule, the name given to a series of decisions originating in the 1950s that have made it difficult for state and local governments to reduce prospective pension benefits for existing employees.

The cases have garnered broad attention in California and nationally, where similar precedents have prevented significant changes to public pensions by states and municipalities struggling with retirement liabilities.

The high court found that “certain changes limited the types of compensation used to determine employee pension benefits were legally permissible,” Moody’s analysts wrote.

“The ruling, which pertains directly to litigation involving the counties of Alameda, Contra Costa and Merced, is broadly credit positive for California and its local governments, because they will avoid liability increases that would have materialized if the court had limited the applicability of the state’s 2013 pension changes,” Moody’s wrote.

Fitch Ratings analysts said the ruling has “no impact on Fitch’s ratings on California state and local governments, as the 2012 reforms and limitations on changing benefits are already assumed in Fitch’s analysis.

Fitch did, however, view the court's "affirmations of the anti-spiking provision as a positive step toward eventually achieving the savings envisioned by the state's comprehensive 2012 reform package."

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