California Bondholders Pay for Pension Explosions

Bankrupt cities halt payments to the bondholders who bought into its pension obligations


In 2005 the city of San Bernardino borrowed $50 million using pension bonds in an effort to shrink its massive debt with the California Public Employees' Retirement Systems (CalPERS). Two years later Stockton floated nearly $125 million in pension bonds because it faced the same pressures as San Bernardino. Neither city reformed or reduced its pension benefits at the time in order to stop the continuing rapid growth of retirement liabilities. In fact, San Bernardino subsequently enhanced pensions.

Both cities are bankrupt today and their initial bankruptcy plans include suspending payments to bondholders, including to those who bought its pension obligation bonds. At the same time the cities are doing little to rein in pension costs. Stockton forecasts that its pension payments to CalPERS will nearly double by the end of the decade. In large part that's because CalPERS has threatened to tie up in court any California municipality that attempts to reduce its pension benefits to current workers.

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  1. “Investors presumably snapped up this pension debt because they were hungry for its higher yields. Maybe investors also found it hard to believe that long-term retirement obligations would help bankrupt a city”

    Well, it’s hard to find the good guys in this kerfuffle. The investors are hoping that, what, Obozo bails out the cities? The cities are hoping manna falls from heaven?
    There’s probably another round or two of profit-taking, but some one else can hope there’s a chair left with the music stops.

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