LOS ANGELES — San Bernardino, Calif. is now planning to give bondholders significantly worse treatment than they have received in any municipal bankruptcy to date, Moody's Investors Service said in a comment piece Monday.
The bankruptcy plan of adjustment city officials presented to the city council on Thursday "proposes to eliminate 99% of the principal value of its pension obligation bonds, while committing to pay 100% of its unfunded pension liability," Moody's credit analysts wrote.
In so doing San Bernardino's plan of adjustment mirrors the approaches of Stockton and Vallejo, two other California cities that recently emerged from Chapter 9 bankruptcy, as well as the approach in Detroit.
"In each case, pensioners were favored over bondholders," Moody's wrote.
U.S. Bankruptcy Judge Meredith Jury ruled May 12 against a motion by the city's pension obligation bondholders' argument that the bonds should be treated on the same level as the city's obligation to the California Public Employee's Retirement System.
"The implication of the ruling is that the use of POB proceeds to fund pensions is irrelevant to how the bonds are to be treated in bankruptcy, and therefore retirees are under no obligation to share losses with bondholders," according to Moody's.
"The ruling and the plan of adjustment are credit negative for San Bernardino's POB investors." Moody's wrote in the comment. San Bernardino proposed in its adjustment plan to only provide pension obligation bondholders with a 1% recovery.
In Stockton, POB holders received a roughly 51% recovery, while overall bondholder recoveries in Vallejo were roughly 60%. Vallejo did not have POBs.
Although Detroit impaired pensions, Moody's estimated that pensioners retained approximately 82% of their benefits, or 52% of the unfunded portion. In comparison, Detroit's POB holders recovered only 12%.
"By leaving pensions untouched, however, the city's financial operations will remain strained by rising pension costs," Moody's wrote about San Bernardino. "Under the city's projections, pension costs will nearly double over 10 years to nearly 19% of expenditures."
When San Bernardino declared bankruptcy in July 2012 it took the unprecedented step of not fully paying its obligation to CalPERS.
But events began to shift earlier this year when San Bernardino announced that under an agreement that came out of confidential mediation with CalPERS, it would not only pay the pension fund back, but also not impair it at all.
The city's reported unfunded pension liability is $286 million, compared with $59 million in outstanding POBs, according to Moody's.
The city has to submit its plan of adjustment to Judge Jury by May 31. A status hearing is scheduled on the matter in mid-June.
The plan of adjustment typically lays the groundwork for a city to exit bankruptcy.
Under San Bernardino's plan, Moody's said, the city forecasts $27 million in average annual budget adjustments that would produce operating surpluses for nearly all of the next 10 years.
Most significantly for Moody's, San Bernardino city estimates that a new sales tax will generate annual revenues of $8.3 million. That will require voter approval.
The city also estimates that contracting out fire and emergency services will save $7-$10 million annually.
The near elimination of the city's annual pension obligation bond debt service payments will save the city approximately $3.5 million per year.
