LOS ANGELES -- If approved, Stockton’s bankruptcy exit plan includes noteworthy elements that could help inform outcomes of future bankruptcies in California and elsewhere, Fitch Ratings said in a report released Tuesday.
“Stockton’s ability to achieve significant concessions from labor under threat of bankruptcy provides food for thought about incentives in other potential cases,” said Amy Laskey, a managing director at Fitch. “The specter of bankruptcy may have motivated labor, although not bondholders, to negotiate.”
While paying the California Public Employees’ Retirement System in full for pensions, the city’s negotiated labor settlements will result in lower future pension costs. Under the plan, current and future recipients of retiree benefits will see the virtual elimination of other post-employment benefits.
Such reduction of benefits may be a benchmark for other negotiated settlements with unions. In future cases, labor may feel the risks of losing all negotiating power in a Chapter 9 proceeding are too great, Fitch said. On the other hand, they may feel that their employer’s need to continue to provide competitive wages and benefits will adequately protect their interests.
Fitch also took note of the city’s plans for its debt obligations—mainly its lease revenue bonds and pension obligation bonds. The city has no general obligation debt outstanding, so the question of how GOs and the property tax securing them would be treated in a bankruptcy settlement in California remains unanswered.
“Fitch has long believed that an entity’s incentive to repay lease debt is informed by the essentiality to the entity of the leased asset securing the debt,” the report said. “The Stockton plan appears to bear out the importance of that consideration while underscoring the difficulty for an outside party in evaluating essentiality.”
The city’s bond-financed garage houses and the leased assets for the financing are considered essential services, and the city plans to repay those bonds in full. However, the city plans to transfer the title for a building that it purchased to be its city hall to Assured Guaranty.
“Fitch would have assumed that the building the city planned to use as its city hall would be among its more essential assets, yet those bonds may not be fully repaid while others will,” analysts said. “City Hall, it seems, is just another office building.”
Other special revenues, including utility revenue bonds, will remain unaffected by the bankruptcy filing and proposed plan, in keeping with expectations for such obligations, Fitch said.
The plan, however, does not meet the common expectation that a general government default would result in high ultimate recovery over time. In this case, bondholders will see significant losses.
“Fitch questions whether this apparent flexibility to adjust debts in bankruptcy will be a factor for other strained governments that are concerned about reducing near- and long-term liabilities,” analysts said.
Stockton’s city council recently approved the plan, but it still needs approval from the U.S. Bankruptcy Court. Fitch expects the bankruptcy court’s ruling on the case to be “instructive, but not definitive” in its evaluation of the plan of adjustment.
