TEXT-Fitch on Florida Supreme Court decision
Sept 14 - Fitch believes an upcoming Florida Supreme Court decision could create a liability for local governments in the state, perhaps as early as fiscal 2013. On Sept. 7, 2012, the Florida Supreme Court justices heard oral arguments regarding a state law requiring government employees to contribute 3% of their pre-tax salaries to the statewide pension plan, the Florida Retirement System (FRS) and eliminating cost-of-living adjustments for service credit earned after July 1, 2011. A class action lawsuit was filed in Leon County Circuit Court challenging the law, which took effect on July 1, 2011, and in March 2012, Judge Jackie Fulford ruled the law violated the contractual rights of the employees, seized private property and damaged collective bargaining. Judge Fulford ordered the state to reimburse with interest the funds deducted or withheld. The state attorney general challenged the ruling. If the circuit court ruling is upheld Fitch does not anticipate rating implications for most local governments. According to the Florida Department of Management Services, Division of Retirement, the estimated cost of losing the 3% pension contribution for one pension year is approximately $600 million for all cities, special districts, counties, and school districts statewide. While not an insignificant budgetary burden, Fitch believes most local governments will act in a prompt manner to preserve a sound level of financial cushion consistent with their generally high credit quality. However, there are several areas of concern, and Fitch believes there can be some stress in weaker credits. A ruling against the state would appear to take away one avenue of flexibility in managing spending. Another risk is that the responsibility to back-fill the 3% employee contribution to FRS (to maintain the actuarially soundness of annual contribution) will revert to local governments as early as fiscal 2013. Fitch expects all municipal and school district budgets for fiscal 2013 will be set by the time the Supreme Court rules, and only a small number of entities will have accounted for this potential expense. Fitch believes school districts could be particularly vulnerable to a ruling in favor of labor, given the less-flexible nature of their budgets and fairly modest balance sheet resources relative to cities and counties. Fitch also notes that the expenditure benefits school districts realized from the law were largely designed to offset a reduction in per pupil funding from the state in fiscal 2012, meaning schools could essentially be exposed to a double penalty absent action by the state to augment education funding. Fitch notes that the lower court placed the responsibility for any retroactive amount payable to employees with the state and FRS, which continues to collect the employee contribution, pending the Supreme Court decision. Reimbursement costs payable from FRS assets would likely result in higher employer contribution rates to the plan.
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