Pension Reform Ruling Viewed Positively by Credit Rating Agency
Moody’s Investors Service Calls Ruling “Beneficial” and a “Credit Positive” for City of San Diego
Wednesday, May 3, 2017 - NEWS RELEASE
San Diego – Following the recent appellate court decision that upheld San Diego’s voter-approved pension reform, Moody’s Investors Service called the ruling a “credit positive” and “beneficial” for the City of San Diego at a time when rising pension costs are putting a strain on City finances.
“This is why we’ve worked so hard to defend pension reform and make sure that the will of the voters is upheld,” said Mayor Kevin L. Faulconer. “It’s great to see a rating agency affirm that keeping our reforms in place is hugely important to our City’s financial health. Unwinding those reforms would be fiscally irresponsible.”
The City maintains a strong Aa2 Issuer Rating from Moody’s.
The “credit positive” comment from Moody’s follows another rating agency’s decision to upgrade the City’s credit rating. In February, Fitch Ratings upgraded the City’s Issuer Rating from AA- to AA and upgraded the City’s General Fund-backed Lease Revenue Bonds from A+ to AA-, with a stable outlook for all ratings.
In 2012, City voters overwhelmingly approved Proposition B – a citizens’ initiative that replaced pensions with 401(k)-style retirement benefits for all new hires except police officers. The state Public Employment Relations Board (PERB) later ruled that the former mayor and City Council violated state labor law because they did not negotiate with City labor unions before placing the initiative on the ballot.
Last month, the Fourth District Court of Appeal annulled PERB’s decision and upheld pension reform. In its ruling, the court said PERB erred when it found that City leaders committed an unfair labor practice by declining to negotiate with unions and that their advocacy for the measure was protected under state law and the First Amendment.
The decision allows the City to not incur the expense of retroactively awarding pension benefits to employees hired after June 2012.
“The ruling is credit positive for the city because it averts a complex, and likely expensive, unwinding of reforms that ended defined-benefit pensions for most city workers hired after June 2012,” Moody’s Investors Service said in an April 25 issuer comment. “The beneficial ruling, which overturns a state labor board decision, comes at a time when rising pension costs are exerting greater pressure on the city’s budget.”
The Mayor’s proposed budget balances a roughly $80 million General Fund shortfall for Fiscal Year 2018, which was largely driven by a $45 million increase in the City’s annual pension payment. The increase stems from changes in actuarial assumptions calculated by the San Diego City Employees’ Retirement System’s independent pension board, such as projected longer lifespans for retired employees, and lower-than-expected investment returns in the past fiscal year.
Mayor Faulconer has proposed balancing the budget with about $22 million in cuts spread across various City departments, the use of $16 million from a new pension stabilization reserve he proposed to the City Council, fiscally responsible changes to reserves, and rolling over $8 million in projected surplus from the current fiscal year budget, among other things.
CONTACT: Craig Gustafson at (619) 453-9880 or [email protected]