March 22, 2013 / 11:01 PM / in 5 years

Moody's lauds Phoenix pension reforms, but sees some risks

SAN FRANCISCO, March 22 (Reuters) - Moody’s Investors Service said on Friday it has a mixed view of two pension measures overwhelmingly approved by voters in Phoenix, Arizona earlier this month.

“Proposition 201 is credit positive as it provides Phoenix modest long-term savings. Proposition 202 provides the city more financial flexibility, but could introduce additional risk,” the rating agency said in a report.

Proposition 201 raises contribution rates and service requirements for new employees covered by the City of Phoenix Employee Retirement System. Proposition 202 adds financial flexibility to how the city manages its pension liabilities.

The first measure is expected to save the city budget an estimated $49.8 million a year by 2037 as new city workers replace existing employees.

Public pension expenses have come under increased scrutiny in recent years as state and local governments have had to respond to lean revenues by cutting services while at the same time making payments to retired public-sector employees whose pensions are guaranteed.

With pension payments locked in for current retirees and public employees, state and local officials have increasingly looked to provide less generous pension benefit for future hires and to require them to contribute more toward their retirement accounts. Future hires also face more years on the job to accrue full pension benefits.

Phoenix’s Proposition 202 allows the city to make extra contributions to the pension system in years when it has available resources to do so instead of having to hew to predetermined amounts.

The measure also allows the board of the pension fund greater leeway to diversify the mix of the fund’s asset classes. That could be risky, according to Moody‘s.

”We note that additional investment flexibility is a positive, but diversification impacts aside, venturing into new asset classes could create new risks,“ Moody’s said. ”While the enacted reforms should improve funding levels, the net impact is uncertain because actual investment returns might deviate from assumed rates of return.

Moody’s rates Phoenix’s general obligation debt ‘Aa1’ with a stable outlook.

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