Legal challenges continue to pose problems for municipalities seeking to cut their pension obligations in California, according to Fitch Ratings, but a voter initiative could present a bigger challenge to unions and retirees.

Fitch said that a recent legal settlement in San Jose resulted in most pension reforms being restricted to new hires instead of being imposed on existing employees and retirees, after the city reached an agreement with police and firefighter unions.

A measure approved earlier by voters that was kicked down the road last year for an additional year may not have borne much fruit as yet, thanks to agreements to delay or even eliminate certain of its provisions, but Fitch says that a new initiative could fare better and provide a means for local governments to change pension agreements.

Efforts are currently underway to gather signatures to put the Voter Empowerment Act of 2016 on the ballot by November of next year. The act, said Fitch, “would amend the state's constitution to permit local voter initiatives to address public employee compensation and retirement benefits. The measure was sponsored by San Jose's former mayor, among other proponents, and appears designed to overturn the California Rule.”

The so-called California Rule, Fitch explained, “provides that pension benefits are a vested contractual right and cannot be impaired for existing public employees and retirees.” Lower courts have supported the California Rule in challenges that have so far arisen to existing pension agreements, but the rule has yet to be tested in California’s Supreme Court.

While Fitch said that the proposed new measure is by no means a sure thing, particularly in the teeth of union opposition — sure to be strong — one thing is fairly certain: As states and municipalities continue to try to reduce their obligations and pension liabilities, there will be more legal challenges ahead for whichever measures do survive at the ballot box.

Instant Insights /

Workers may face voters, not courts, over pension cuts in California: Fitch

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