News Column

City manager discounts Moody's report

July 17, 2014

By Roger Phillips, The Record, Stockton, Calif.

July 17--STOCKTON -- City Manager Kurt Wilson took issue Wednesday with a report by a bond-rating service which explores the potential ramifications if a judge were to reject Stockton's bankruptcy plan and rule that the city must "significantly reduce" its pension costs to exit Chapter 9.

The six-page report, released this week by Moody's Investors Service, analyzes statements made in court last week by Judge Christopher Klein. It seizes on a remark by Klein that he "might very well conclude" he has the authority to reject Stockton's contract with the California Public Employees' Retirement System when the bankruptcy trial resumes Oct. 1.

"Such a decision would be a positive development for bondholders of local governments that are already in bankruptcy," the Moody's report says, adding that rejection of the CalPERS contract could force Stockton to renegotiate "with all of its creditors, which may increase the recovery levels for some bondholders."

Stockton's lead bankruptcy attorney, Marc Levinson, referred questions about the Moody's report to Wilson on Wednesday morning. Wilson declined an interview request, but did issue a written statement.

"The Moody's article makes some assumptions that are confusing to those of us who were present in the courtroom at the hearing on July 8," Wilson said. "That hearing did not produce any major developments with respect to CalPERS."

Klein is considering whether to confirm Stockton's bankruptcy recovery proposal, called a "plan of adjustment." If he confirms the plan, Stockton will exit bankruptcy after more than two years.

The city negotiated settlements with all but one of its creditors before its trial began. The Moody's report says if the court decides Stockton should have sought to adjust its CalPERS costs, bondholders could have "higher recoveries" and that the ruling "would undermine CalPERS' fundamental position against allowing pension adjustments in bankruptcy."

Moody's adds, "Stockton's plan calls for no adjustment in pensions, but the city could be forced to reconsider this position in the face of an adverse ruling."

Wilson, though, has consistently argued that the city did adjust its pension costs during the bankruptcy process by reducing staffing and employee compensation, and by cutting retiree medical benefits.

"To say we didn't touch pensions is wrong," Wilson said in February.

Wednesday, Wilson added, "The city has focused on reducing the level of all debt, including pension obligations, and the plan of adjustment achieves that goal. Our retirees and employees took substantial and long-term personal hits throughout this process in order to contribute to the fiscal health of the city. The point of contention appears to be that we did it at the bargaining table rather than in the courtroom."

CalPERS has stated that Stockton would face a $1.6 billion termination fee if it defaulted on its financial obligations to the pension giant. Klein, though, questioned last week whether CalPERS would have the power to enforce the fee in such a scenario.

This week's Moody's report also says a ruling by Klein against CalPERS "could encourage other stressed municipalities" facing steep pension costs to file for bankruptcy. The implication by Moody's is that more cities might take the step given the ability to tackle pension costs during bankruptcy proceedings.

But Moody's predicted bankruptcy filings would remain "rare events" because of the major hurdles municipalities must surmount to be eligible to file for Chapter 9.

Contact reporter Roger Phillips at (209) 546-8299 or Follow him at and on Twitter @rphillipsblog.


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Source: Record (Stockton, CA)

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