SAN FRANCISCO (Reuters) - Defaults and bankruptcies by municipal bond issuers are likely to remain few but the cases of the California cities of Stockton and San Bernardino may signal unwillingness among financially troubled cities to pay their debt obligations, a Moody's Investors Service report released on Thursday said.
"The looming defaults by Stockton and San Bernardino raise the possibility that distressed municipalities -- in California and, perhaps, elsewhere -- will begin to view debt service as a discretionary budget item, and that defaults will increase," Anne Van Praagh, the Moody's managing director who wrote the report, said in a statement.
Stockton filed for bankruptcy last month. San Bernardino's city council declared a fiscal emergency on Wednesday, allowing the city to proceed with a Chapter 9 bankruptcy filing without having to seek mediation with its creditors.
Stockton, a city of 300,000 in California's Central Valley, filed for bankruptcy after three months of confidential talks with creditors. The talks failed to produce sufficient concessions to help the city close its $26 million budget gap.
Stockton's revenue has collapsed in recent years and city officials say the city can no longer afford to pay for generous benefits, notably health care benefits for retired city employees.
City officials also blame years of fiscal mismanagement and too much debt for Stockton's financial straits. Stockton has defaulted on some of its debt since February, allowing the trustee for one of its bond insurers to seize a building once slated to be its future city hall and three parking garages.
San Bernardino, a city of 210,000 located 65 miles east of Los Angeles, has burned through its reserves and is out of other ways to pay for its longstanding deficit spending, according to city officials.
San Bernardino officials say the city faces a nearly $46 million deficit and is so low on cash that they may not be able to make its payments over the short-term. The city will take about 30 days to make its filing for Chapter 9 protection.
A state law approved after Vallejo, California, declared bankruptcy in 2008 requires financially troubled cities to enter into talks with creditors to try to avert bankruptcy. But the law also allows cities to skip talks and move directly toward a bankruptcy filing by declaring a fiscal emergency and stating that they are unable to pay their obligations within 60 days.
"Although a few issuers in California and other states have suggested an unwillingness to meet debt service, we have also seen many distressed issuers demonstrate a strong willingness to pay despite substantial budgetary pressure," Van Praagh said. "Our expectation is that unwillingness-driven defaults will rise but remain rare, particularly among Moody's-rated issuers."
(Reporting By Jim Christie; Editing by Chizu Nomiyama and Phil Berlowitz)