Box office poison

This week saw a major blow to Los Angeles’ pension reform when the city’s employee relations board ordered the city council to rescind a 2012 law that scaled back pension benefits for new employees of the Coalition of Los Angeles City Unions. Los Angeles will likely appeal the ruling and, as Fitch Ratings notes in an analysis released Aug. 5, the city is expected to eventually prevail. Still, the challenge for L.A. is a notable one. Many localities and states have instituted pension reforms that only apply to new employees because the prevailing notion is that the pension protections afforded to current employees don’t extend to people who haven’t been hired yet.

In its analysis, Fitch says “the ability to adjust pension benefits for future employees [is] critical to Los Angeles' financial flexibility.” Savings from the reform are estimated at approximately $4.3 billion over 30 years, beginning at close to $4 million in the first two years. The labor board ruling upholds an earlier ruling by a hearing officer who said the changes, which also hiked the retirement age of new workers, had to be negotiated even if they applied to new employees.

Putting out the financial fire

Bankrupt San Bernardino is looking everywhere to trim costs. The latest idea is a plan that would make it cheaper to run the fire department – by making someone else do it. This week, the city manager got permission from council to seek proposals from outside fire departments that could potentially provide fire services for less money.

The San Bernardino Sun reports that those outside departments vying for the gig could include the San Bernardino County Fire Department and the state fire agency. The city manager would have the authority to negotiate with departments that respond to the request. It’s a bold move for the council (previous outsourcing attempts have failed) but that’s in part because it’s expected to be challenged by the local fire union. But the city's bankruptcy, for which it filed in 2012, has made the situation more urgent. “There will come a time when the judge will throw us out of bankruptcy court” if the city doesn’t show financial viability, Councilman Fred Shorett told the Sun. “We need to be looking under every stone.”

Do you want the good news or the bad news first?

With another three months of ratings actions under their belts the three major credit ratings agencies have issued some new assessments of municipal financial health and the bottom line is things are, well, OK. Good, but not great. Each report has pluses and minuses. That wishy-washy enough for you?

Let’s start with Standard & Poor’s assessment (the unexciting report title, "U.S. Public Finance Rating Changes Were Still Positive In The Second Quarter, But A Bit Less So," basically says it all), which finds that the ratio between its credit rating upgrades and its downgrades over the last three months is the smallest it’s been in a year. It’s now issuing about two upgrades for every one downgrade, instead of the four-to-one ratio during the first three months of 2014. But, and here’s the silver lining, S&P attributes the lion’s share of that ratio shift to its downgrade of New Jersey and its related credits. (S&P also downgraded Kansas' debt this week so we may see a repeat tale for the third quarter of 2014.)

Moody’s Investors Service tells us the almost opposite story. Its downgrades are still outpacing upgrades, which has been the trend for this agency. (For more on why Moody’s and S&P seem to be heading in opposite directions, read this story about some who question the methodology.) What’s different for Moody’s is that for the first time in six years the overall value of debt it upgraded was higher than the total value downgraded. This shift  the agency attributes to its upgrade of states – like California and New York – that hold a lot of debt. Moody’s final assessment of muni finance is lukewarm, noting that most issuers will “continue to see stability” (not exactly a headline-grabbing word), but some still have not recovered from the recession.

Finally, Fitch Ratings comes in with its own muted assessment that municipalities and states should see only “moderate” economic and revenue growth for the remainder of the year. Like S&P, Fitch’s ratings upgrades outpaced downgrades about two-to-one for states. But its ratio for municipalities was about even. Fitch says it expects most states to remain stable (just Connecticut, Illinois, Mississippi, New Jersey, and Pennsylvania have a negative credit outlook; everyone else has a stable one) as they continue to manage budgets closely. But some munis are on shakier ground in those states that have either a history of not helping troubled cities or only stepping in after a crisis escalates. (And yes, Detroit is specifically mentioned.)