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Moody's: Bankrupt California Cities Will Struggle With Pe

Stockton and San Bernardino, two California cities that filed for bankruptcy in 2012, may not recover unless they rein in their rising pension costs, Moody’s Investors Service said in a report.

Unless they reduce their obligations to the California Public Employees’ Retirement System, the largest U.S. public pension, both cities face renewed financial struggles after exiting bankruptcy court, Moody’s said, citing the example of another California city that filed for bankruptcy, Vallejo.

A federal judge ruled in December that Detroit could reduce pension payments as part of its $18 billion Chapter 9 case. San Bernardino has withheld payments to Calpers, which pension fund lawyers have contended violates state law. Stockton’s fiscal plan does not call for reducing its payments to Calpers.

“In California, particularly for municipalities with pensions under the California Public Employees Retiree System, or Calpers, bondholders will likely continue to pay a steep price if bankruptcies remain venues for restructuring debt obligations but pension liabilities remain untouched,” Moody’s Senior Credit Officer Gregory Lipitz said in a written statement accompanying the report.

Vallejo continued to make pension payments during its bankruptcy, which stretched from 2008 to 2011. The Northern California city could be forced to seek bankruptcy protection again as it confronts a structural budget deficit equal to 6 percent of revenues, according to the Moody’s report.

Stockton is taking a similar approach as Vallejo, while San Bernardino’s plan to deal with pension liabilities “is not publicly known,” Moody’s said.

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To contact the reporter on this story: James Nash in Los Angeles at jnash24@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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