A California Supreme Court ruling is a credit positive for local governments dealing with other post-employment liabilities, according to Moody’s Investors Service.

LOS ANGELES - The California Supreme Court's decision not to review a lower court's decision on other post-employment benefit liabilities is a credit positive for San Diego and other local California governments, according to Moody's Investors Service.

The high court's choice not to consider the appeal leaves standing a December 2013 ruling by an appeals court affirming San Diego's ability to modify non-vested retiree health benefits.

"The legal ability to address unfunded OPEB liabilities through bargaining is credit positive because it translates into budgetary flexibility," Moody's analyst Thomas Aaron said in a report, released Friday.

OPEB benefits are typically funded on a "pay as you go" basis, rather than pre-funded like pensions. So the flexibility upheld by the courts to reduce costs is important in achieving material reduction in total obligations, Aaron said.

San Diego changed retirement health care benefits in fiscal 2010 with a benefit freeze. The city estimated that the freeze could lower its OPEB unfunded liability to $969 million from $1.4 billion, if applied permanently.

San Diego further reduced its unfunded OPEB liability through labor negotiations in fiscal 2012.

"The state Supreme Court denial of the application for review further establishes a difference between the treatment of retiree health care benefits and pensions under state law," Aaron said. "Public pension benefits enjoy much stronger legal protection, and reform options are generally limited to lowering benefit formulas for future employees only."

In contrast, municipalities in California can reduce OPEB benefits provided that state collective bargaining laws are followed and that benefits were not established as vested contractual rights.

Under San Diego's city charter, attempts to change the pension system require a vote of employees and retirees. The state appellate court affirmed that retiree medical benefits are separate from the city's pension system and do not require a vote to be changed.

Unfunded OPEB liabilities have grown to significant levels for many California local governments. Los Angeles County, for example, reports an unfunded OPEB liability of nearly $26 billion, more than 2% of its $1.1 trillion tax base, according to data gathered by Moody's.

San Francisco reported a $4.4 billion OPEB liability, and the city of Los Angeles reported a $2.3 billion liability.

Fitch Ratings said that while the April 30 court decision removed one legal challenge to public employers' efforts to reduce obligations, many other hurdles remain.

"We generally view OPEBs as more flexible than pensions," Fitch said in a report on Thursday. "This decision supports that view, as well as the view that local governments' — in this case California's — ability to make material adjustments to these benefits."

However, Fitch expects OPEB litigation to continue as public employers in the state continue to look for ways to reduce long-term liabilities and other growing expenses.

Several cases arising from OPEB cuts continue to work their way through the state's courts, and any new efforts are likely to face legal challenges as well.

"Litigation is likely to slow the pace of OPEB reform in California and the prospect of litigation may also lead some employers to reconsider such efforts," Fitch said.

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