SAN FRANCISCO - A judge's ruling approving Stockton, Calif.'s bankruptcy exit plan, which does not impair pension obligations, is a credit positive for the California Public Employees Retirement System, according to Moody's Investors Service.
Moody's analysts said U.S. Bankruptcy Judge Christopher Klein's Oct. 30 ruling likely sets a precedent that pensions will enjoy better treatment than other debt in California Chapter 9 cases, analysts said.
His decision came after he gave an earlier ruling on Oct. 1 that pensions could be impaired in Chapter 9 bankruptcy, though the city did not attempt to do so.
"The inclusion of pension cuts in Stockton's bankruptcy exit plan, in and of itself, would not have materially impacted CalPERS' financial health because Stockton would have been obligated to pay a substantial termination fee," analysts said in the report, released Wednesday. "However, it would have stood as the first pension impairment in a California Chapter 9 bankruptcy and established a new landmark precedent."
Such a ruling would have increased the risk that other distressed California municipalities would file for bankruptcy in an effort to extract cuts to pension liabilities, which would have had a negative effect on CalPERS' financial health.
It would also have had longer-term negative credit implications because it would have critically damaged the notion that CalPERS is an arm of the state and therefor exempt from federal bankruptcy court jurisdiction, Moody's said.
"Favorable outcomes for CalPERS in the Stockton, CA and San Bernardino, CA bankruptcy proceedings lend further support to CalPERS improving financial profile because it reduces the likelihood that other CalPERS contracting employers will race to declare bankruptcy to reduce growing pension liabilities," the report said.
CalPERS is rated Aa2 by Moody's, after an upgrade from Aa3 in July. The upgrade was based on the system's improving credit profile of the retirement plan's main sponsor, the State of California, as well as the steps taken by CalPERS to increase contribution rates in an effort to remediate its funding gap over time.
Moody's said in a previous report that while Chapter 9 filings will remain rare, Klein's oral ruling that pensions can be impaired will give other local governments more negotiating leverage with labor unions.
Standard & Poor's also said Stockton's experience with municipal bankruptcy is unlikely to cause other municipalities to view Chapter 9 as an attractive option.
