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Weekly Credit Outlook for Public Finance - March 20, 2014

Weekly Credit Outlook for Public Finance - March 20, 2014

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Published by jon_ortiz
Moody's Investors Service
Moody's Investors Service

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Published by: jon_ortiz on Mar 20, 2014
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MARCH 20, 2014
Mayors in Anaheim, San Jose and other cities halted efforts for a statewide vote in November that aimed to help local governments with pension cost flexibility.
Transit authorities are boosted by the highest public transportation use in in 57 years and growing sales tax revenues that they rely on for capital and operating expenditures.
The ruling affecting police employees allows the county to avoid the reimbursement of $230 million (9.2% of budget) in lost wage increases from 2011 through 2013.
The county’s General Obligation Limited Tax creditors realized an overall recovery rate of 88%, ranging from 88%- 95% for warrant holders to 0% for parity interest rate swaps. The overall GO recovery rate is much higher than the overall recovery rate of 54% realized by county sewer warrant creditors and slightly higher than our previous expectations.
We expect the “two-midnight rule” to reduce hospital operating profits in 2014 because it will lower Medicare reimbursement for many cases. Although the rule will affect all acute care hospitals, smaller community hospitals with shorter average lengths of stay and less complex cases are most at risk.
Affecting $6.3 billion, the downgrade to Baa1 from A3 reflects close ties to the City of Chicago, whose rating we recently downgraded.
Chicago Park District's (IL) GO Downgraded to A3 from A1; Outlook Negative Impacting $826 million, we believe Chicago city officials’ influence on cost allocations and levy setting could indirectly affect the district’s finances.
Orange County, NY's GO Downgraded to Aa2 from Aaa; Outlook Negative Affecting $268.5 million, the action incorporates operating deficits and declines in reserve levels, in combination with property value declines.
University of San Diego, CA’s Revenue Bonds Upgraded to A1; Outlook Stable The upgrade to A1 from A2 impacts $168 million and reflects excellent financial management, contributing to strong cash flow and debt service.
Newark, NJ’s A3 GO and Baa1 GO Limited Tax Ratings Placed Under Review for Downgrade Impacting $540 million, the action reflects the likelihood that the city will be late producing its 2014 budget, and the city’s persistent structural deficit.
The upgrade to Aa2 from Aa3, affecting $6.6 billion, reflects an improved risk profile owing to support from the state public utility commission.
The downgrade to Aa3 from Aa2, affecting $136 million, incorporates weakened operating performance and competitive enrollment pressures.
Access our moodys.com public finance landing page at moodys.com/UsPublicFinance
California Pension Reform Proposal Not on 2014 Ballot, a Credit Negative for Local Governments
On March 14, proponents of a pension reform initiative, including the mayors of   Anaheim (Aa2 stable) and San Jose (Aa1 stable), postponed their efforts to qualify the initiative for the 2014 California  (A1 stable) general election. The initiative’s supporters will now aim for 2016 instead of qualifying for the 2014 ballot. The delay is credit negative for California local governments because they face rapidly growing pension costs  with few tools to address them. Adoption of this pension reform measure would have amended the state’s constitution and provided local governments with a significant measure of additional pension cost flexibility. The mayors sought to allow local governments to negotiate lower pension benefits for future work by current employees; benefits accrued prior to any such renegotiation would be unaffected. Currently, California law protects both current employees’ accrued pension benefits and those for future work, foreclosing any opportunity for renegotiation. Generally, pension benefits cannot be reduced once an employee has been hired. Proponents of pension reform postponed their push following a March 14 court ruling that turned aside their efforts to change the measure’s official summary. Their challenge contended the state attorney general used “false, misleading, partial and/or argumentative” phrasing and “unnecessarily highlighted popular and sympathetic categories of public employees” such as teachers, nurses and peace officers.
 Local government pension costs in California continue to rise, prompting San Jose Mayor Chuck Reed,  Anaheim Mayor Tom Tait and several others to launch the initiative. For Moody’s-rated local governments, pension costs increased by an average of 14% from fiscal 2011 to 2012,
 and absent pension reform, we expect this rate of increase to continue for the next several years. Costs are escalating particularly for the thousands of local governments that participate in the California Public Employees Retirement System (CalPERS), including Anaheim. For example, CalPERS projects Anaheim’s public safety pension contribution rates as a percentage of salaries will increase annually, reaching 44% by 2020, compared to 32% in 2014 (see Exhibit).
Anaheim’s CalPERS Pension Contributions Projected to Grow Significantly
Source: CalPERS 6/30/2012 actuarial valuations for City of Anaheim’s Safety and Miscellaneous Plans. Does not reflect effects of CalPERS February 2014 rate increase or any offsetting savings due to Public Employees’ Pension Reform Act of 2013 (PEPRA).
 Petition for Writ of Mandate. Reed, Kampe, Tait, Morris and Gomes (Petitioners) v. Bowen and Harris (Respondents). Superior Court of the State of California for the County of Sacramento.
 Source: Moody’s Investors Service.
10%15%20%25%30%35%40%45%50%2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
   C   o   n   t   r    i    b   u   t    i   o   n   s   a   s   %    o    f   C   o   v   e   r   e    d   P   a   y   r   o    l    l
Safety Contribution Rate Misc Contribution Rate
Thomas Aaron
Eric Hoffmann
Senior Vice President
For local governments with CalPERS plans, costs could increase further with the February announcement that the pension system will implement a third broad increase in plan contribution requirements since March 2012. The state retirement system notes “the impact of higher contribution levels and their continuance for an extended period will be difficult for employers to bear.”
  We are not able to quantify the reform proposal’s total potential savings had it become law, since the savings  would depend on actions taken by local governments. However, the state Legislative Analyst’s Office estimated the savings across that state would have reached “hundreds of millions of dollars each year or more” in the near-term and billions more over the long-term. The proposed ballot initiative was spearheaded by San Jose’s Reed, whose city manages its own pensions. Local governments that do not participate in CalPERS, including large cities such as Los Angeles (Aa2 stable), San Diego (Aa3 stable) and San Jose, would still benefit from the flexibility to curb pension costs afforded by the proposed measure. If proponents are ultimately successful in gathering sufficient signatures to place it on the ballot, more than 50% of voters must approve the measure for it to go into effect. This year’s signature gathering effort ceased prior to achieving the required amount to qualify for the ballot. Reed has indicated efforts will be made to place it on the ballot two years from now.
 CalPERS. “Annual Review of Funding Levels and Risks as of June 30, 2012.”

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