2 MOODY’S WEEKLY CREDIT OUTLOOK: US PUBLIC FINANCE EDITION MARCH 20, 2014
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
Senior Vice President