WASHINGTON Oct 2 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
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."