Pensionary Potential Pitfalls

If the California Public Employees’ Retirement System prevails in having courts define San Bernardino’s obligations to the pension fund as immutable in the city’s bankruptcy case, it could have widespread ramifications including sweeping bond downgrades, according to Matt Fabian, managing director of Municipal Market Advisors (MMA): “With recent rating agency actions taking a dimmer view on California general fund obligations generally, we suspect success by Calpers would trigger sweeping downgrades across the state…We also assume a strong pullback by lenders, perhaps exceeding the rating impact, implying steep funding costs for issuers attempting to sell new lease debt.” If CalPERS succeeds, lease-backed debt such as certificates of participation may be untenable, the report said. Protections afforded pension funds in the California state constitution have also hampered efforts by the state and cities to reform the benefits of current employees. MMA estimates California local governments have about $33 billion in outstanding COPs, plus more unsecured, general fund backstopped debt, noting: “If pension obligations cannot be adjusted—even in bankruptcy—this debt will be effectively subordinated to a permanently-extendable obligation to Calpers.”