New York's passage of a plan to reduce near-term local pension payments is a credit negative, Moody's Investors Service says.

New York lawmakers approved the plan as part of the fiscal 2014 budget. The state's fiscal year began April 1.

Up to now, local governments have been required to fund 100% of their annual required contributions. The legislation allows local governments to make fixed pension payments in the next seven years below 100% of ARCs.

The local governments make these payments to three state pension funds: the Employee Retirement System, the Police and Fire Retirement System and the Teachers Retirement System.

"The deferral of pension contributions would increase the unfunded pension liabilities of participating local governments, a credit negative," wrote Moody's assistant vice president Robert Weber.

New York pensions' annual required contributions have grown rapidly in recent years. For example, the ARC for the state's ERS and PFRS funds rose to $2.2 billion in 2012 from $190 million in 2002.

The state expects that, all other things being equal, there would be a tendency for ARC demands for localities to decline after seven years. This is because of the adoption of a pension plan for new employees that was adopted in 2012. The recently enacted "pension smoothing" plan would bring some of the savings into the next seven years, New York Gov. Andrew Cuomo said.

The pension smoothing plan will go into effect for the ERS and PFRS pending the approval of State Comptroller Thomas DiNapoli. DiNapoli supports the plan and will approve it, said his spokesman Eric Sumberg. The smoothing plan for the TRS will go into effect if the State Teachers' Retirement Board approves it.

Local participation in the plans is optional.

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