UPDATE 1-Fitch: court decision on retiree benefits may be credit negative

Wed Oct 2, 2013 5:39pm EDT

WASHINGTON Oct 2 (Reuters) - A recent court decision in California may limit how much U.S. state or local governments can cut healthcare benefits for their retirees when their budgets are under stress, which could be credit negative, Fitch Ratings said on Wednesday.

In a special comment, Fitch said the decision by the Superior Court of California in Los Angeles overturned a freeze on retiree healthcare cost inflation enacted by Los Angeles in 2011.

The decision indicates "local and state government may not have as much ability to control other post-employment benefit (OPEB) liabilities and consequently have less overall budget flexibility than is traditionally assumed."

Public employees' pensions are generally enshrined in contracts and protected by states' constitutions, but other benefits that retirees receive - almost entirely healthcare - are not. Generally, local governments have been able to cut those benefits in response to budget problems.

The case is limited, and will likely have a small fiscal impact on the city, but the ruling shows that public employees and others can successfully challenge pension and benefit reforms in court, Fitch said.

"In thinking about budget flexibility, it is important to think in terms of avoidable versus unavoidable costs," the rating agency said. "Where state courts elevate OPEB to the same standing as pensions, overall budget flexibility will be reduced for locals in those states."

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