As beleaguered cities wrestle with the dilemma of choosing between legitimate obligations to both workers and bondholders, Moody’s Investors Service has weighed in with a threat to municipalities that making the wrong choice could hobble them forever.
“We are considering . . . potential across-the-board adjustments of debt ratings for California cities to reflect the new fiscal realities and the governmental practices in addressing them,” Moody's said in a report released last week. Ratings downgrades could affect the ability of cities, school districts, counties and special districts to raise money in capital markets, further exacerbating their tenuous financial situations.
The ratings agency said it would review the finances of all cities in California in light of recent municipal bankruptcy declarations and assess “the new fiscal realities and the governmental practices.” Moody’s also extended its warning to other states where beleaguered cities might be thinking about seeking judicial relief, with Managing Director of Public Finance Robert Kurtter giving Michigan and Nevada a special shout-out.
Three California cities have declared bankruptcy this year, although the Mammoth Lakes filing was brought on by the loss of a single $43 million breach-of-contract judgment that emptied municipal coffers.
Cities that have seen their revenue streams devastated by the economic downturn, are being pressured to renegotiate worker contracts, abrogate pension agreements, cut workforces and curtail public services rather than give bondholders a haircut on investments they made.
Nearly 100 California governments floated $9 billion in pension debt in the last decade, according to Thomson Reuters.
Giving support to the notion that economics is merely politics in disguise—and that politics is war without bloodshed—a number of financial sources have waged a war of words calculated to sway public opinion and intimidate the other side.
When Stockton declared bankruptcy on June 28, Assured Guaranty bemoaned the sword-wielding assault on one “class” of creditor over another and warned the city would be shut out of capital markets for its transgression. Writing of the city’s dealings with the California Public Employees’ Retirement System (CalPERS), Assured Guaranty asserted: “The city took the bondholders’ money to give to Calpers, and now proposes to leave those funds with Calpers and pay Calpers everything else Calpers decides the city owes.”
“The protection of Calpers benefits for the mayor, city council and other city employees is clearly not in good faith,” carped the National Public Finance Guarantee Corp., which challenged the Stockton bankruptcy in court.
Although the collapse of both Stockton and San Bernardino have been blamed on wage-and-pension over-generosity and political underhandedness, its hard to ignore that both were at the heart of the housing collapse that destroyed their tax base and eviscerated revenues.
It is also hard to ignore that the same financial interests who are threatening to destroy any municipality that reneges on bond obligations were heavily involved in precipitating that collapse.
–Ken Broder
To Learn More:
Moody's: More Calif. Cities at Risk of Bankruptcy (by Gosia Wozniack and Hannah Dreier, Associated Press)
Moody's to Review Ratings on California Cities (by Mike Cherney and Kelly Nolan, Wall Street Journal)