Tag Archives: Stockton bankruptcy

Stockton, bankruptcy and municipal workers’ pensions

October 2, 2014 By in bond market, Current Market Thoughts, Portfolio management Tags: , , , , , , Leave a comment

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.

 

 

Stockton, CA–a courtroom battle with uncertain (but maybe big) consequences

April 8, 2013 By in economics Tags: , , , , Leave a comment

Stockton, CA

Stockton, California is a town of just under 300,000 citizens, located about 80 miles east of San Francisco.  Stockton has recently achieved two unenviable distinctions:

—it’s a repeat “winner” of the Forbes prize as the “most miserable city” in the US, although it has fallen/improved to #8 in this year’s poll (in case you’re interested, Detroit is the current champ; Modesto has replaced Stockton as #worst in CA).

—it’s also the largest US city (so far) to have filed for bankruptcy.  Stockton did last year to deal with fiscal troubles that a welter of bad decisions it made during the housing bubble caused.

the bankruptcy:  

–creditors

The city has two big creditors:

–the CalPERS state pension system for government workers, to which it owes $900 million or so; and

–municipal bondholders, who own $600+ million of Stockton paper.  Of that, about a quarter is insured, meaning the insurance companies–not bondholders–are on the hook for any losses.

–last week

The bond insurers, along with Franklin Advisors and Wells Fargo representing bondholders, went to court to try to prevent Stockton from entering bankruptcy.  They argued two points:

1.  that Stockton was not really insolvent, and

2.  that the city’s proposed plan of adjustment discriminates unfairly against bondholders because it leaves its debt to CalPERS untouched, meaning the bondholders and insurers would absorb 100% of any losses.

Last week a US court said Stockton could declare bankruptcy.  Judge Christopher Klein ruled that:

1.  Stockton is insolvent, and

2.  the discrimination issue doesn’t need to be addressed before Stockton can enter bankruptcy.  It does, however, need to be dealt it can exit bankruptcy.  Judge Klein wrote, “And that problem is probably going to require me to get down into the nitty-gritty of the CalPERS situation. And I, at this point, have no clue how that’s going to come out.”

–what I find worth watching

To me, the biggest issues are:

–whether government employee healthcare or retirement benefits are subject to renegotiation in bankruptcy;

–whether any court action hinges on the judge’s description of Stockton benefits as overly generous and subject to upward manipulation through “pension spiking,” or whether it will have more general application, and

–whether CalPERS will be forced to share in any pain.

The whole question of guaranteed lifetime benefits–something that has virtually ceased to exist in the corporate world in the US–is a highly emotionally and politically charged one, as you can see from just about any internet discussion you find about Stockton.  The Stockton case could have an outsized ripple effect on public debate.   It may also end up influencing Californians about where they choose to live and work.

I don’t think it’s yet clear what the real position of the Stockton city government is on after-the-fact reductions in employee benefits is.  If you hope to be reelected, it would be much better to be “forced” by a court to make cuts than to volunteer to make them yourself.  CalPERS has already made it clear, though, that it regards the $900 million Stockton pension shortfall to be solely the city’s problem.

This case will also doubtless also have consequences in the arcane world of municipal bond insurance, where premiums are very small because claims almost never happen.  A large loss from Stockton bonds may dampen insurance companies’ enthusiasm for guaranteeing the offerings of iffier credits.