UPDATE 2-Pension fee hikes seen positive for California govts

Fri Apr 19, 2013 2:42pm EDT

April 19 (Reuters) - A hike in pension fees by the California Public Employees' Retirement System will pressure other spending by local governments in the near term, but will be a long-term credit positive for the state's bond issuers, Moody's Investors Service said on Friday.

California's state government will also benefit as higher fees will be used to fully fund the retirement system and reduce the likelihood of sharp increases in employer contributions to it in any given year.

"Despite the near-term pressure, in the long run the increased contributions are likely to benefit both local governments and the State of California," Moody's said in a commentary.

Moody's rates California A1, with a stable outlook.

The $255 billion Calpers board approved on Wednesday accounting changes requiring state and local agencies, cities and counties to pay rate increases of up to 50 percent.

Moody's said most governments paying into the pension fund will be able to adapt to the higher contributions as they are phased in but warned some might find the increases overwhelming.

"While marginal increases in required pension contributions phased in over five years will likely be manageable for the state and most California local governments, the most fiscally challenged local governments could find these proposed increases unmanageable," Moody's said.

California's state government and its local governments are beginning to see their revenue stabilize and improve after several years of having to contend with weak revenue.

Two sizeable California cities, Stockton and San Bernardino, last year filed for bankruptcy, citing large bills for pensions as one of the reasons for their financial distress.

California's state government will face the same pension contribution pressures as local governments, but "Because the state's liquidity position and financial condition are significantly better at this time than they have been in recent years, the increase in contributions should be manageable, and will serve to improve the funding status of the plan," Moody's said.

Fitch Ratings in a report on Friday said it also expects rising pension contribution rates will strain budgets of California's state and local government employers.

But Fitch also said accounting changes pushing the rates up will improve the funding level of California's massive pension fund, which is the nation's largest U.S. public pension fund.

The revisions are "prudent steps that will improve the system's funded ratio and the predictability of payments for employers over the long term," Fitch said.

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