SAN FRANCISCO, Sept 5 Standard & Poor's Ratings Services on Wednesday cut its underlying rating on two series of Stockton, California, pension obligation bonds one notch to a default-level D after the city skipped a $4.3 million payment on the debt.
"The rating action reflects our view of the city's nonpayment of $4.3 million for principal and interest due Sept. 4, 2012, for the series 2007A and 2007B," S&P credit analyst Chris Morgan said in a statement.
Stockton is in bankruptcy court seeking protection from its creditors, and the skipped payment is consistent with its plan for restructuring its finances, S&P said.
Assured Guaranty insures $121 million of Stockton's pension obligation bonds. The bond insurer is challenging Stockton's bankruptcy filing, saying the city favors its biggest creditor, the California Public Employees' Retirement System, and has not proven its insolvency.
Because the pension obligation bonds are insured, S&P said its long-term rating on the debt remains at AA-minus with a stable outlook.
Bond insurer National Public Finance Guarantee Corp, a subsidiary of MBIA Inc, also is challenging Stockton over its plan to exclude pensions from its restructuring plan.
Stockton officials have said retired city employees are being asked to sacrifice their health-care coverage to help with the city's financial restructuring, while current city employees have already sacrificed by accepting layoffs and pay cuts and by paying more toward their pensions.