PHOENIX - San Jose, Calif.'s pension settlement with the city's police and firefighters is evidence that reducing pension liabilities will be challenging for most governments and ultimately lies in the hands of the courts in each state, Fitch Ratings said in a commentary released Friday.

The city reached an agreement framework with public employees last month regarding litigation over the pension reform ballot measure known as Measure B.

San Jose voters authorized broad changes to public pensions under that measure in 2012, but it almost immediately faced legal challenges. California courts took the stance decades ago that a pension is a "vested right" that cannot be cut- the so-called "California Rule.

The new agreement would restrict most pension reforms to new hires, leaving benefits for existing employees and retirees largely untouched.

"It demonstrates how difficult it is," former San Jose Mayor Chick Reed, who campaigned for Measure B as mayor, told The Bond Buyer. "The prospects for individual cities in California doing something significant is very slim."

Reed is now backing a proposed ballot measure that would amend the state's constitution to permit local voter initiatives to address public employee compensation and retirement benefits

The outcome of the San Jose negotiations "underscores our view that reducing pension liabilities will be challenging for most governments and ultimately dependent on state-by-state judicial review," Fitch said.

The rating agency noted that local government pension reform in California could see increased attention under Reed's Voter Empowerment Act initiative. The measure would mandate that future increases in pension benefits for state and local government workers be pre-approved by voters.

The state's retirement systems oppose the measure, and have said that it would cause chaos to undermine what they see as rights protected by the state constitution.

"The likelihood of approval for the new initiative is uncertain, particularly given anticipated strong opposition from public employee unions," Fitch said. "However, ongoing legal battles over pension reform can be expected regardless of the initiative's outcome and will continue to challenge efforts to reduce pension liabilities in California and other states."



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