Stockton, bankruptcy and municipal workers’ pensions

In June 2012, Stockton, CA entered bankruptcy, burdened, as one would expect, by two types of obligations it was unable to meet:  debt service on borrowings, and funding of pension/health care plans for city employees.

The city’s initial reorganization plan called for employee pension obligations to be met in full–as California state law mandates.  This meant most of the restructuring losses would be borne by lenders, with some suffering virtually total losses.  Naturally, these lenders, or their insurance companies complained, arguing that such treatment violated fairness provisions of the federal bankruptcy code.

Yesterday, Judge Christopher Klein, the federal judge presiding over the bankruptcy proceedings, ruled that the lenders are right.  To my layman’s eye, he seems to be saying that because it legislated a strict set of criteria that a town must meet before being allowed to seek bankruptcy, California was also implicitly releasing a bankruptcy-qualifying town from having to comply with the state law on municipal pension integrity.

The judge’s opinion is a little more complicated than that, since it also involves the position of CalPERS, a  state-wide organization that administers pension plans for both the state and municipalities in California.  But it follows a similar ruling in the Detroit bankruptcy.

This is a complex and controversial topic.  And we’re still in the earliest stages of the journey toward it resolution.  But from an investment point of view, I can’t imagine that these ruling will do anything to increase spending by Baby Boomers who are state/local employees or retirees.  Another reason to think harder about Millennials.

 

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: