LOS ANGELES — The recent transit strike in the San Francisco Bay Area highlights potential credit risks that the area is exposed to, Fitch Ratings said in a report Wednesday.

"Public employee unions in the San Francisco Bay Area have become increasingly vocal in the aftermath of the recession, challenging local governments with job actions and strikes in an effort to achieve compensation increases," said Stephen Walsh, a director at Fitch. "These recent labor demands pose a risk to local government financial flexibility where revenues continue their slow recovery and benefit costs continue to rise."

Union workers at the San Francisco Bay Area Rapid Transit District went on strike on July during contentious negotiations with the agency over the terms of a four-year labor contract. Gov. Jerry Brown requested a 60-day cooling off period, which ended on Oct. 10. Workers began another strike on Oct. 11, which ended four days later when they reached a tentative agreement with BART management.

Fitch said management's ability to maintain financial flexibility in the face of rising labor demands is vital to credit quality in the Bay Area. The agency expects labor demands to rise along with local economic improvement.

Other factors are California's statutory labor protections and the Bay Area's strong labor tradition. Labor costs typically account for upwards of two-thirds of local government expenditures and have been a key factor in recent municipal bankruptcies in Detroit, Stockton, and San Bernardino, according to Fitch.

"Fitch does not anticipate any new municipal bankruptcy filings among entities it rates in the San Francisco Bay Area, but local governments that lower reserves below adequate levels or incur operating deficits to meet rising compensation levels will likely face downward rating pressure," analysts said.

 

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