LOS ANGELES — An appeals court ruling upholding San Diego’s pension reform is credit positive because it averts a complex and likely expensive unwinding of the reforms, says Moody’s Investors Service.

An adverse opinion from the state’s Fourth District Court of Appeals could have cost the city millions by creating retroactive pensions for more than 3,000 workers hired over the past five years.

“The beneficial ruling, which overturns a state labor decision, comes at a time when rising pension costs are exerting greater pressure on the city’s budget,” Moody's analyst Thomas Aaron wrote in an issuer comment Tuesday.

The city’s fiscal 2016 comprehensive annual financial report estimated its unfunded pension liability would have increased by $20.2 million if the reform were unwound, Aaron wrote.

The city’s pension contribution has grown at roughly 6.5% annually since fiscal 2007. Pension costs are expected to jump by 24% in fiscal 2018 due to actuarial losses and a mortality assumption change, Aaron wrote.

Even with the use of $16 million from a dedicated pension reserve to help alleviate the jump, he wrote that the pension contribution will consume nearly 16% of the city’s general fund revenues.

The April 10 appeals court ruling was on litigation over voter-approved pension changes passed in 2012.

The state’s Public Employment Labor Relations board had ruled in 2015 that city officials should have discussed Proposition B with its six unions before the measure was placed on the ballot. The appeals court overturned those findings.

Proposition B shifted all newly-hired city employees, except police officers, from the city’s traditional defined benefit plan into a 401(k)-style retirement plan.

The ruling also has ramifications for other California governments, because it clarified two important legal questions, Aaron wrote.

The court ruled that a citizen’s initiative placed on the ballot through signature gathering does not require negotiations with labor unions, nor is the city obligated to negotiate with unions even if city officials actively participate, he said.

The San Diego Municipal Employees Union has asked the California Supreme Court to review the decision. The higher court would have to decide to review the decision and overturn it to change the outcome.

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