San Bernardino Bankruptcy Exit Plan Seen As Blow to Pension Bondholders

LOS ANGELES — A recent ruling by the bankruptcy judge in San Bernardino's Chapter 9 case, and the city's bankruptcy exit plan, are credit negatives for San Bernardino's pension obligation bond investors, according to a Moody's report.

San Bernardino filed its bankruptcy exit plan on May 22 proposing to eliminate 99% of the principal value of its pension obligation bonds, while committing to pay 100% of its unfunded pension liability.

The plan of adjustment came on the heels of a ruling by U.S. Bankruptcy Judge Meredith Jury that the city can treat POBs differently than its unfunded pension liability, despite creditor objections.

"The implication of the ruling is the use of POB proceeds to fund pensions is irrelevant to how the bonds are to be treated in bankruptcy, and therefore retirees are under no obligation to share losses with bondholders," according to the June 4 Moody's Credit Outlook.

The city's reported unfunded pension liability is $286 million, compared with $48.4 million in outstanding POBs, according to the Moody's report.

By proposing to severely reduce unsecured debt obligations while preserving pensions, the city's exit plan mirrors the approaches of two other California cities that emerged from bankruptcy in recent years; Stoctkon and Vallejo, as well as the approach taken by Detroit.

San Bernardino is proposing a 1% recovery for POB investors, while its secured lease-revenue bondholders would not be impaired, according to Moody's.

"Ultimate recovery rates for San Bernardino's bondholders may change before the court confirms the bankruptcy exit plan," according to Moody's. "City officials hope that confirmation of the plan will occur in about a year."

Creditors will have a chance to vote against the plan once ballots are mailed out along with a disclosure statement.