LOS ANGELES — Moody's Investors Service called San Bernardino's interim agreement to make the California Employees' Pension System whole in the city's Chapter 9 bankruptcy a credit negative.

If San Bernardino follows Stockton and Vallejo's example by impairing its bond creditors to the benefit of retirees, it consolidates a pattern in California Chapter 9 cases in which "pensions fare better than lease-backed and pension-obligation bondholders," Moody's analysts said in a Weekly Credit Report released Nov. 24.

"The agreement with CalPERS significantly advances the city's complex plan of adjustment in bankruptcy and indicates that San Bernardino is unlikely to reduce pensions in its plan of adjustment, a credit negative for holders of the city's certificates of participation and pension obligation bonds," Moody's analysts.

The city disclosed in a Nov. 17 court filing that it will make CalPERS whole by catching up on $14 million in missed payments over a two-year period ending either June 2016 or the date the bankruptcy plan is accepted. The payments missed over a 12-month period beginning after the city filed bankruptcy in August 2012 represent only a small fraction of its unfunded pension liability, which Moody's estimated at $286 million as of the fiscal year ended June 30, 2014. The city's net pension liability for the fiscal year ended June 30, 2014 is an estimated $731 million - or nearly 10 times its outstanding debt, according to Moody's. It resumed payments to CalPERS in July 2013.

In Stockton, POB holders received only 40% to 50% of their original claim. U.S. Bankruptcy Judge Chris Klein, the judge in the Stockton case, upheld the city's plan, which didn't impair the pension fund, despite an earlier ruling by Klein that the city could impair pensions. Moody's deemed that ruling a credit negative for certain investors.

Moody's analysts said it is premature to speculate about the treatment of creditors. U.S. Bankruptcy Judge Meredith Jury just set a May 30 deadline for a plan of adjustment during a hearing last week. But taking into account what has transpired thus far, Moody's analysts said the CalPERS agreement means that the city is more likely to restructure its POBs, which are approximately 62% of the city's $74 million in debt, not including OPEBs and pension liabilities, and eliminate its OPEB liabilities. Stockton and Vallejo significantly reduced both in bankruptcy, Moody's said.

The city's unfunded pension liabilities comprise 70% of the city's liabilities, while other postemployment benefits totaled 12%, POB's totaled 11% and COPs and other debt represented 7%, according to Moody's.

"San Bernardino's choice to leave its accrued pension liabilities unimpaired means that its contribution requirements to CalPERS will likely increase to the point where they weaken the city's financial profile, even after the relief provided by the bankruptcy adjustments," Moody's said.

The rating agency said analysts expect a similar weakening to occur in both Vallejo and Stockton, because the pension funds latest actuarial valuations for each city forecast unrelenting increases to required contributions, despite the very strong investment performance of CalPERS in 2013 and 2014.

A Moody's chart demonstrated the jump all three California cities are expected to experience in pension contributions as a percentage of covered payroll from 2016 to 2021. The rating agency used information from CalPERS actuarial valuations as of June 30, 2013 to compile the chart.

For public safety employees, the numbers rise from 38.8% to 49.3% in San Bernardino over the five-year period, from 45.5% to 58.1% in Stockton, and from 57.6% to 72% in Vallejo.

Before it reached its agreement with Calpers, San Bernardino was the only California city to challenge the pension fund in Chapter 9 bankruptcy. City officials said that "annual pension contribution increases would be difficult to absorb without restructuring other expenditures," according to Moody's.

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