Back to the (Bankruptcy) Drawing Board for California Towns?

By Unions FOXBusiness

We now have the latest report from Moody’s Investors Service about Vallejo, Stockton and San Bernardino, California.  The title -- “Without Pension Relief, Bankrupt California Cities Risk Return to Insolvency” -- tells the tale.

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Specifically, Moody’s warns that Vallejo, with its persistent structural budget imbalance, “risks a second bankruptcy filing if it continues on its current path.”  The villain plaguing Vallejo’s budget yet again is its public employee pension obligations. Exiting bankruptcy the first time around, Vallejo cut retiree health benefits, created lower benefit tiers for new hires and made city employees contribute more toward their pensions. But Moody’s argues that Vallejo missed that opportunity in bankruptcy to cut its pensions. 

“Vallejo’s current budget challenges are largely driven by its failure to alter its pension obligations to CalPERS, the California Public Employees Retirement System,” the report says.

Moody’s analyst Tom Aaron, who co-authored the report, says, “By failing to address its  pension liabilities (Vallejo) remains vulnerable to increasing annual payments” as the city’s finances continue to deteriorate. Those payments will exceed 70% of payroll in six years.  Vallejo’s projected 2015 budget deficit is now $9 million and growing.

Stockton and San Bernardino, both currently in Chapter 9 bankruptcy, face similar pension  problems even after they exit bankruptcy. Moody’s warns, “If these cities fail to overhaul their pension obligations before exiting Chapter 9, these growing pension liabilities could over time become increasingly burdensome.”  

That’s one way of putting it. Others say that without major pension overhaul, both cities will be in Chapter 9 Groundhog Day.

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Cutting pensions won’t be easy, to say the least. CalPERS claims to be an arm of the state and therefore exempt from the Chapter 9 bankruptcy code, and nobody has challenged CalPERS in bankruptcy court yet. Until they do, Moody’s says, the tale of California municipalities entering and exiting bankruptcy will be retold again and again.

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