Moody's: Stockton Closer to Bankruptcy Exit

Stockton, Calif.'s recently approved sales tax increase is a credit positive for the city because the additional revenue increases the likelihood its reorganization will be approved by the bankruptcy court, according to Moody's Investors Service.

"It is also a credit positive for municipal bond insurers, National Public Financial Guarantee Corp., Assured Guaranty Municipal Corp. and Ambac, who could have faced increased pressure to renegotiate less favorable terms with the city," vice president and senior credit officer Gregory Lipitz said in a report released Friday.

Stockton's bond insurers are exposed to nearly 90% of the city's outstanding general fund debt. Moody's estimates that insurers of the city's $121.8 million of pension obligation bonds face losses as cents as high as 60 cents on the dollar.

Insurers of unrated lease revenue debt face losses ranging from 0% to 22% and insurers of the $11.3 million Series 2006 lease revenue bonds stand to receive full repayment under the exit plan.

Stockton voters on Tuesday approved raising the sales tax to 9% from 8.25%, effective Jan. 1, to help pay for public safety programs and bankruptcy recovery. The city estimates that when fully implemented, the sales tax revenues will begin generating approximately $28 million in fiscal 2015, giving it a surplus of $9 million and a total general fund balance of $18 million.

The bankruptcy exit plan relies on the fund balance to finance projected operating deficits until fiscal 2023.

With improved chances for a plan confirmation, it's likely that adjusted net pension liabilities managed by California Public Employees' Retirement System will remain untouched, Moody's said.

Stockton decided not to pursue cutting pension liabilities under its plan of adjustment. Moody's estimates the city's adjusted net pension liability is approximately $500 million, or 285% of fiscal year 2011 operating revenue.

"By forgoing a chance to reduce its pension obligations, Stockton leaves open the possibility that the liabilities could continue to plague the city's finances long after a bankruptcy exit," Lipitz said. "This seems to be happening to Vallejo, California, which is struggling to balance its budget."

Stockton's city council approved the exit plan in October. It still needs to be approved by U.S. Bankruptcy Judge Chris Klein.