Stockton bankruptcy plan sets good precedent for CalPERS, credit firm says

Stockton’s court-approved plan to continue full contributions to its CalPERS-administered pension program sets a positive course for the retirement system, Moody’s Investors Service said in a Wednesday morning statement.

The firm’s assessment is the other side of what it said shortly after bankruptcy Judge Christopher Klein’s Oct. 1 non-binding comments that pensions aren’t immune to bankruptcy law. Wall Street applauded his statements and Moody’s said the judge’s remarks signaled that bankruptcy could be a new tool for financially-stressed municipalities.

But now that Klein has blessed Stockton’s plan, which cuts payments to debtors but leaves its contributions to CalPERS untouched, Moody’s says the case “likely sets a precedent that pensions will enjoy better treatment than debt in California (municipal bankruptcy) cases.”

Klein said that rejecting Stockton’s plan would irreparably degrade the city’s core services, including police and fire departments already struggling to hire and retain workers. Moody’s said Klein’s decision was “somewhat of a surprise,” given his earlier comments, and would discourage other contracting employers from using bankruptcy to cut their growing pension liabilities.

Moody’s cited the Stockton case as a reason to keep CalPERS’ rating at Aa2. The rating is used for CalPERS’ Credit Enhancement Program, where the fund lends its rating to issuers of debt for a fee.

This story was originally published November 5, 2014 at 12:57 PM.