LOS ANGELES — The plan of adjustment bankrupt Stockton, Calif. proposed gives bondholders a better idea about recovery rates for the city's lease revenue, enterprise revenue, and other obligations, but major questions remain, say analysts at Moody's Investors Service.

While the city is proposing a wide range of recovery on its outstanding bonds, the recovery rate is related both to the essentiality of the underlying lease and the availability of non-general fund revenue to offset debt service, Moody's said in a new report.

Stockton has settled with all three of the insurers of its outstanding lease-backed and pension obligations, which cover almost 90% of the city's outstanding debt supported by the city's unconditional repayment promise — its pension obligation bonds — and those conditioned on the use or occupancy of the leased assets.

"A major underlying thread in the recovery is the degree of essentiality each underlying asset has to the functioning of the city," analysts said. "At one end of the spectrum, some bondholders will receive 100% of their principal and interest."

These include bonds secured by leases covering important city functions, like fire, police, and other administrative functions.

Bonds secured by revenues of parking structures, Stockton's arena, and rentals to an office building that includes its city hall receive lower recoveries, Moody's said. And at the lowest end of the spectrum are bonds secured by leases on the city's golf courses and park, where the city proposes about 1% recovery.

Bond supported by special revenue pledges, including water and sewer and special tax bonds, would remain unimpaired.

Since Stockton has no general obligation debt, investors will gain no additional clarity on the status of California general obligation pledge in a Chapter 9 bankruptcy case.

Under the city's proposed plan to exit bankruptcy, the California Public Employees' Retirement System remains an unimpaired creditor, but the question of whether accrued unfunded pension liabilities can be restructured in a California bankruptcy is left open.

"Under Stockton's plan, the unfunded accrued pension liability of its retirees remains untouched, and the city will continue to fully fund its required contribution to CalPERS," Moody's said. "We estimate that the city's unfunded accrued pension liability, from both pension plans held by CalPERS, is approximately $500 million."

At the same time, the city is proposing to eliminate almost 99% of its $538 million in current retiree health-care liabilities, analysts added.

Moody's said that Stockton's treatment of its contract with CalPERS could be a disincentive to other cities considering bankruptcy as a way to address pension costs, since bankruptcy has so far proven to be an ineffective strategy to avoid increasing pension costs.

By not rejecting the CalPERS contract and modifying its accrued pension liabilities, Stockton will continue to include its share of current year accruals and an amortization component, which is based on an unfunded liability as it currently exists.

The amortization requirement has been a main driver of the city's pension cost over the last five years, Moody's said.

Stockton's city council approved city management's plan to exit bankruptcy last week. The city filed for bankruptcy in June 2012.

The next step is for all parties with impaired claims to vote on the plan and for a bankruptcy judge to approve the plan.

A bankruptcy plan can only be confirmed as long as one impaired class has accepted the plan. Moody's said all bond insurers are likely to approve the plan, based on agreements with the city.

Voters must also approve a 3/4 cent sales tax that will be on the ballot in November.

If the plan is not confirmed, Stockton will have to modify its plan, which could mean looking at restructuring its pension obligations, Moody's said.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.