Moody's called Bankrupt Stockton's debt 'low' last year
The headline story is that Stockton, Calif. is but the largest U.S. city to file for bankruptcy. The Northern California municipality failed to come to terms with its creditors while a state-mandated mediation period and set in motion a filing for Chapter 9, the city-government version of Chapter 11. The total debt load has been reported as $700 million, though other sources have put it at somewhere between $500 million and a billion.
Stockton's story is being widely presented as a sad case of a city that tried to expand into being a bedroom community for the San Francisco Bay Area and got hammered by a combination of a busted housing boom and city retiree pension and health-care obligations. The loss of property tax revenue and the cost of taking care of former firefighters and cops forced the city to borrow too much money, and the debt load in the end became too great.
The mediation process break down?
So why did the mediation process break down? It's probably comes down to Stockton's bondholders — investors who bought its municipal debt, which like all "muni" debt, carries tax advantages. The muni market is huge and attractive, totaling about $3.7 trillion.
Bankruptcies like Stockton's are rare, even though a number of cities in California are currently in financial trouble, including Los Angeles, which is facing a $200-million budget deficit. In the final analysis, municipal bonds are as a rule considered to be relatively safe investments — "relatively" because some experts think that we're heading for a muni metdown, during others think the muni market is on the whole solid.
And materialize they did, more than substantially. However what about this assessment that Stockton had "low debt levels." $700 million doesn't sound all that low! Nevertheless, although Moody's was cutting Stockton's rating, it hadn't but cut it to "junk" status. Stockton, as late as last year, was everything considered investment grade, meaning that institutional investors, just as mutual funds, could even so buy its debt.
Other top creditors include investors holding $124.3 million of Stockton's pension obligation bonds, $40.4 million of the city's variable rate demand obligations, $35.1 million of the city's public facilities fees bonds and $31.6 million of the city's parking garage debt.
Moody's has but cut Stockton's bond rating into default territory. However those bondholders may figure that they stand to do better in the Chapter 9 than they would have done if they'd agreed to slash their investment in Stockton while the mediation period.