The ratings agency says that the risk of default on municipal bonds is rising. It will look at the debt ratings of 93 cities in the state (though no counties). Basically, Moody's says that California cities have become riskier bets, the result of poor oversight, difficulty in raising taxes, and a still-depressed economy (that last item applies more to inland parts of the state). Lower ratings mean higher borrowing costs. From the WSJ:
"Across-the-board rating revisions are possible following a review of our ratings on California cities over the next month or two," Robert Kurtter, managing director for U.S. state and regional ratings and lead author of the report, said in a statement. "Additional negative rating actions are also possible for individual cities that are experiencing more acute economic and budgetary distress." Gail Sussman, managing director at Moody's, said that cities' inability and unwillingness to pay bondholders is relatively new in U.S. public finance, but still rare. However, she said California cities' use of bankruptcy as a tool to extract concessions from bondholders is a significant new risk.
The other issue emerging is the risk to bondholders. The city of Stockton, which filed for Chapter 9 protection, says it would rather default on the money owed a bond-insurance company than the pension benefits owed its workers. From Steven Greenhut, vice president of journalism at the Franklin Center for Government and Public Integrity (via Bloomberg):
"Chapter 9 was not intended to be used as a sword to prefer one class of similarly situated creditor over another," said Assured Guaranty in an Aug. 1 statement. "Stockton's attempt to transfer the cost of lucrative, above-market employee wages and benefits granted when tax revenues were flush to capital markets creditors by haircutting bond principal is unprecedented, a contortion of the bankruptcy process and will foreclose Stockton's access to the capital markets for the foreseeable future." CalPers's general counsel, Peter Mixon, responded to Assured Guaranty, with bravado typical of the retirement fund: "The obligations owed to the public workers of the city have priority over those of general unsecured creditors including bondholders," he said. "Unlike insurance companies, policemen, firefighters and other public employees are not in a position to evaluate credit risk of their employers. Assured Guaranty is in the business of evaluating these risks."
There's no telling how all this will play out - the Stockton and San Bernardino bankruptcies are probably years from being resolved - but it's easy to see why Moody's would want to have a look. From AP:
"To summarize, we expect ... more bankruptcy filings and bond defaults among California cities reflecting the increased risk to bondholders as investors are asked to contribute to plans for closing budget gaps," the report said. The report noted that the municipal bond market has long been characterized by low default rates and relatively stable finances, an outlook that is beginning to change as bankruptcy becomes a tool for cash-strapped cities. That requires Moody's to reassess the financial position of all California cities "to reflect the new fiscal realities and the governmental practices."