(Reuters) - California bankruptcies will likely rise, Moody's Investors Service said on Friday, saying that it is considering credit rating downgrades as financial stress on cities and other localities rise, encouraging lawmakers to use bankruptcy as a tool to win bondholder concessions.
Three cities have sought bankruptcy protection since June, including Stockton, which became the largest U.S. city ever to file. The housing bust and California laws that limit tax hikes and encourage negotiations could raise that number, Moody's Investor Services said.
"Bondholders could become embroiled in the solution to local government fiscal stress," Moody's said in a new report. Stockton and San Bernardino both have indicated they want to cut pension bond payments as part of their turnaround strategies.
"We are considering... potential across-the-board adjustments of debt ratings for California cities to reflect the new fiscal realities and the governmental practices in addressing them," Moody's said.
Counties, school districts and special districts could be downgraded, it said, adding that bankruptcy risks are still low but increasing.
Many counties, cities and towns around the nation are struggling with the rapidly rising costs of pensions and health benefits for public workers. Their financial problems are heightened by the still-fragile economic recovery, which is restraining revenue growth.
The remedies California's municipalities can employ are more limited than those of some other states, citing restrictions on property tax hikes and cities' considerable independence from the state government, Moody's said.
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