TEXT - Fitch says Florida decision on pensions positive for state and locals
Jan 22 - Fitch believes that the Florida Supreme Court's decision last week to uphold legislation that mandates that participating employees contribute to the state-run Florida Retirement System (FRS) is a credit positive for both the state and local governments. The decision will be final if a motion for a rehearing is not filed by next week. The state law, which became effective July 1, 2011, requires employees to contribute 3% of their salaries to FRS and eliminates cost of living (COLA) increases for service credit earned after July 1, 2011. After 1974, employees did not contribute to FRS. The decision, if finalized, ensures that state and local governments will continue to benefit from pension reform with lower pension costs and a greater degree of financial flexibility. The decision reverses a lower court decision that declared the legislation to be unconstitutional. If the lower court decision had been upheld by the Florida Supreme Court and the 3% employee contribution mandate set aside, the state and local governments would have been obligated to reimburse employees over $1 billion and up to $600 million, respectively, for their prior contributions. In addition, state and local government annual pension contributions would increase (by nearly $900 million in fiscal 2014) to compensate for the annual loss of the employee contributions and reinstatement of the COLA. School districts would have been especially vulnerable given the less flexible nature of their budgets and their weaker balance sheets relative to cities and counties. Fitch does not plan on taking any imminent rating actions as a result of the Supreme Court decision as the effects of the state's pension reform are already embedded in our current Florida ratings. With this decision, Fitch expects that the state legislature may propose additional reforms, possibly including a measure requiring new employees to participate in a 401(k) type pension plan rather than the current defined benefit plan. Fitch will continue to monitor situation for any new developments.