The warning was aimed directly at two bankrupt cities, Stockton and San Bernardino, but Moody's cited the experience of Vallejo, which emerged from an earlier bankruptcy without reducing its pension debt and is once again facing fiscal turmoil.
"In California, particularly for municipalities with pensions under the California Public Employees Retiree System, or CalPERS, bondholders will likely continue to pay a steep price if bankruptcies remain venues for restructuring debt obligations but pension liabilities remain untouched," Moody's Vice President Gregory Lipitz said in a special report on the California situation.
Stockton did not seek to reduce its pension obligations, despite pressure from other creditors, and has nearly concluded a deal with creditors on a recovery plan.
San Bernardino is still in the mediation process with creditors, but has indicated that it may seek pension modification.
CalPERS backed Stockton's approach to bankruptcy but has been fighting San Bernardino's bankruptcy petition, contending that under California law, public employees' pensions are contracts that cannot be involuntarily "impaired."
No California bankruptcy judge has ruled on whether pensions can be altered but the judge in Detroit's multi-billion-dollar bankruptcy has said that pension obligations are debts that may be subject to modification like other debts.
"Vallejo substantially restructured its compensation structure, including significant cuts to retiree health care benefits, but by failing to address its pension liabilities it remains vulnerable to increasing annual payments," Moody's Tom Aaron, the co-author of the report, said in a statement.
Moody's warned that "Vallejo now faces the risk of a second bankruptcy if its finances continue to degrade. In its budget message the city stated it has a "well below fiscally prudent reserve level" of 5 percent of expenditures and that by (fiscal year) 2015 its budget deficit could reach $8.9 million without corrective measures."