LOS ANGELES – San Bernardino, Calif.'s bankruptcy settlement agreement is credit negative for pension bondholders, according to Moody's Investors Service.
The city revealed March 28 the terms of the agreement it had reached with Commerzbank Finance & Covered Bond S.A. and Ambac Assurance Corp., the creditors on $50 million par in pension obligation bonds issued by the city in 2005.
The settlement's stated 40% recovery rate is significantly higher than the city's original 1% proposal, Moody's analysts said.
It remains a significant loss and credit negative for the San Bernardino POB holders and for all investors in unsecured local government debt paid from general government revenues without a general obligation pledge, analysts said.
"This agreement is another example of relatively low recovery rates for such debt in bankruptcy compared with secured debt and pension obligations to current employees and retirees," Moody's analysts said.
Moody's further contends that based on available information and using present value estimates, the city's POB holders will actually recover less than 30% of their investment, not the stated 40%.
San Bernardino would join Stockton, Calif. and Detroit in the ranks of recent Chapter 9 cases in which bondholders have taken substantial haircuts, while pension benefits are touched lightly, or not at all.
POB investors recovered 12% in Detroit and 41% in Stockton, according to Moody's.
Stockton's pensions were not impaired, and Detroit's pensioners retained approximately 82% of their benefits.
When San Bernardino declared bankruptcy in July 2012, it took the unprecedented step of not fully paying its obligation to California Public Employees' Retirement System.
The city had indicated initially it would impair CalPERS in its bankruptcy, but instead reached an agreement in 2014 that gives the pension fund a nearly full recovery. It even agreed to repay its missed payments.
In exchange for preserving pensions, retirees agreed to cuts in other post-employment benefits, primarily retiree health insurance. The city eliminated its monthly subsidies and retirees were placed in a retiree-only benefit program, instead of a blended program with active city employees, resulting in increased premiums.
The changes would result in an 86% cut to the city's OPEB liabilities, Moody's analysts Karolina Norris and Thomas Aaron said in the report.
"Cutting OPEB along with debt, while leaving pensions untouched, is consistent with Stockton and Detroit bankruptcies," Norris and Aaron said. "Our calculations estimated OPEB recovery at only 1% for Stockton and 10% for Detroit."
San Bernardino's plan to leave accrued pension benefits unimpaired leaves it responsible for $275 million of unfunded liabilities on a reported basis as of June 2014, analysts said, which equates to a Moody's-adjusted net pension liability of $860 million. Beyond just the unfunded liability however, the city retains all of the pension asset performance risk going forward, meaning it continues to backstop $1.2 billion of total pension liabilities on a reported basis.
