Pension Crisis

Even in Bankruptcy, Unions Get Special Treatment

The pension-debt time bomb detonates in bankruptcy court.


Municipal bonds have long been among the safest investments, but a coming wave of municipal bankruptcies in California—and the disturbing way one of those cities is stiffing its bondholders—could change perceptions about such bonds' safety.

The struggling port city of Stockton has declared bankruptcy after a spending spree where officials granted workers an absurdly generous lifetime medical care benefit, dramatically increased pensions, and floated debt to finance dubious downtown redevelopment projects.

When the city couldn't make its pension payments in 2007, it borrowed $125 million in bonds to cover the mess it created by its pension increases. Now the city government is as upside-down as many of its homeowners and officials are blaming the foreclosure crisis, conveniently neglecting that the current reduction in property tax revenue has come after years of dramatic increases in such revenue.

Now Stockton officials want to stiff Assured Guaranty, the Bermuda-based bond insurance company, for about $103 million. The company—noting that Stockton is going under in part because it can't make its pension payments to the California Public Employee's Retirement System—argued in a statement, "If Stockton is disappointed with CalPERS' investment performance, it should be taking that up with CalPERS rather than reneging on the city's obligation to holders of the pension bonds."

Stockton's city manager Bob Deis accused the company of "bad faith" and "whining" even as he whined that Assured Guaranty doesn't care about anarchy in Stockton's streets, as the city's crime rate soars after police cutbacks.

But it's not the fault of lenders that city officials are so unconcerned about the safety of their residents that they continually put the demands of wealthy pensioners above the needs of local residents. Like many cities in this state, Stockton's infrastructure is crumbling as officials serve mainly as benefit providers to those who work for the city or who are retired from city government.

Deis's statement is the equivalent of a wastrel who spent 10 years running up debt on luxurious living, then got mad at his bank for wanting to get paid back: "Hey, you don't care that I can't feed my kids!"

Of course, it's hard to top the arrogance of the scandal-plagued CalPERS, which has responded to Assured Guaranty's complaints by insisting that "obligations owed to the public workers of the city have priority" over creditors such as Assured Guaranty. CalPERS also insists the media is "hyping" the idea that pension promises have anything to do with cities going belly up. CalPERS, which in 1999 advocated retroactive pension increases based on assumed rates of returns that essentially required the Dow Jones to reach 25,000 by 2009, is backed by taxpayers whether its projections are right or wrong.

As cities run out of money and pension obligations grow, we will increasingly see officials faced with a choice between protecting city workers or taxpayers. It's not hard to understand why the politically powerful CalPERS is so confident that the demands of public employees always come first.

As the Stockton Record reported recently, CalPERS "dwarfs all other creditors with a $245 million liability in the city over the next decade. Yet National Public Finance Guarantee Corp., an insurer of several Stockton bonds, contends in its court papers that CalPERS is conspicuously missing from the list of those Stockton engaged in pre-bankruptcy negotiations … ."

That company argues persuasively that the city never had any intention to seek reduced payments from CalPERS. In bankruptcy, the company or city runs out of money and then the creditors fight it out. Here, it seems like city officials cherry-picked which debtors to stiff, which certainly backs the company's case that Stockton officials have showed bias and that this is a distortion of the bankruptcy process.

While the bond markets aren't yet spooked, they do have reason for concern given that pension debts are growing, and there are few other places to trim if public employee retirement plans are off the table. Even the feds are sounding some warning bells. As Bloomberg reported last month, "The U.S. Securities and Exchange Commission said it plans to seek power to force better disclosures from states and cities participating in the $3.7 trillion municipal-bond market." They should add this disclosure: Your retirement investments will always lose out to public employee pension demands.

Those of us who have viewed Chapter 9 bankruptcy as a useful option to help troubled cities get their books in order have miscalculated. Public employee unions and their allies in the courts and the retirement systems are so powerful that even during dire financial circumstances, their selfish demands trump everything else. Although bankruptcy can be a good tool, as Orange County's 1994 bankruptcy made clear, the process is no panacea for incorrigibly wasteful, union-controlled local governments.

The crisis is not going away, despite CalPERS' insistence otherwise. Former Los Angeles Mayor Richard Riordan, for instance, said earlier in the week that the state's largest city faces "disaster" if officials there don't fix LA's pension system.

We should closely watch the unfolding proceedings in bankruptcy court, as Stockton goes through this process. But the more significant battle is in San Jose, as courts determine whether voters' support for a June pension reform measure that cuts pensions for existing workers is legal. The key there is the battle over cutting pensions for current workers, given that cuts to new hires only will not defuse the pension-debt time bomb.

If the courts side with reformers, there may be hope for rolling back pension costs and saving city services. If not, Californians better get ready for higher taxes and fewer municipal services, given that there are precious few options left. And without a reform path that touches pensions for existing workers, investors might want to rethink the long-term safety of their bond holdings, which will become an even bigger target.


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  1. Even in bankruptcy, public-sector unions are getting special treatment.

    Well, how else are the politicians supposed to buy votes?

    1. Apparently Judges need to buy votes or politicians too (depending on the state).

      1. Judges are unionized and have the same overgenerous pensions too

    2. Pandering to illegal immigrants ? dead people?

      1. Pandering to illegal immigrants ? dead people?

        Actually, that is why showing ID to vote is racist.

        1. Hey, how the hell did you sneak an ? past the squirrels?!

          1. Wait, how did YOU sneak an past the squirrels!?

  2. What’s worse about this is that Stockton had opportunities to fix unbalanced compensation costs but instead balked for fear of upsetting unions ( Unions have way to much sway over politicians, and if politicians continue to be afraid to ruffle the feathers of unions, we’re never going to get out of this hole.

  3. Obviously the solution is to force Stockton’s rich residents to pay their fair share. After all, they’ve been reaping outsized benefits from the public employees.

  4. “As cities run out of money and pension obligations grow, we will increasingly see officials faced with a choice between protecting city workers or taxpayers”

    In CA, the blues will run ads claiming it’s the fault of the ‘intransigent’ reds. Both of them.
    The voters will buy it and hand over more dough.
    Is it something in the water?

    1. The beautiful climate lulls the inhabitants into a false sense of security. No struggle for survival, no survival skills like accurate double entry accounting get hewned. Darwinism is the only form of justice this world has ever seen.

      1. I think the climate and scenery do more than that. I think they wind up filling the people that live amongst them the idea that they are imbued with some moral superiority, since they have been so blessed with pleasant environs.

  5. Full scale riots should be forthwith in stockton…unfortunately there will be full scale ‘meh’

  6. I’m not a bankruptcy lawyer, but I always thought that in bankruptcy, payroll gets first priority (and pension payments are part of payroll), secured creditors second, and unsecured creditors third. Seems to me that claims by employees and former employees should have priority over bondholders. Am I misunderstanding something?

    1. Nope. The bankrupt employer’s liability for the underfunded pension plan is an unsecured liability, not payroll, and ranks below secured liabilities.

      1. Until enough political pressure is brought to bear GM style on the Judge to fuck the debt holders.

      2. Unless you’re the UAW, of course.

      3. The bankrupt employer’s liability for the underfunded pension plan is an unsecured liability, not payroll, and ranks below secured liabilities.

        Perhaps you missed the Obama administration’s opinion on where secured creditors stand in line.

        1. The secured creditors will get an extra large cup of shut up. Taxpayers will have to settle for a small, or ‘tall’ for Starbucks fans.

    2. Not for private corporations at least. The rule may be different in the case a municipality though.…..bility.pdf“In bankruptcy, while claims arising from pension plan obligations may have priority over general unsecured claims in particular circumstances and with certain monetary limits, they are usually treated as general unsecured claims without any priority or subordinated status in connection with any distributions in bankruptcy. Therefore, they usually rank equal with any unsecured lender and senior to subordinated lenders who have agreed to be subordinated to pension liabilities. Many subordinated lenders do not agree to be subordinated to pension liabilities and agree to subordinate themselves only to indebtedness for borrowed money. Accordingly, a secured lender will be entitled to recover its allowed claims in full to the extent of the value of its interest in the collateral, while the claims of an unsecured creditor, including those arising from a pension plan, will have lower priority. Pension plans are not automatically terminated in bankruptcy and can sometimes survive the bankruptcy process intact. When a pension plan is terminated in bankruptcy, the PBGC steps in and uses its own assets to ensure that participants do not lose all their benefits.”

      1. So is it possible that a bankruptcy judge could do some legal hocus pocus (isn’t all the fucking law nothing but 500.00/hour hocus pocus? but I digress) a la John Roberts to insure, pun intended, that Calpers gets higher on the pecking order of claimants?

        1. See Chrysler and UAW.

        2. If I recall, the GM bankruptcy was a negotiated deal. In bankruptcy, various classes of creditors can vote on whether to accept a proposal.

          Naturally, the union pensions voted to fuck the non-union pensions, which pretty much got zeroed out.

          Exactly how the voting went on the bonds, I don’t recall. I do recall that a bunch of those bonds were held by TARP banks, who either had just had their biscuits buttered by the administration, or were hoping to.

          1. The debtors never accepted the deal.

          2. Naturally, the union pensions voted to fuck the non-union pensions, which pretty much got zeroed out.

            This was actually a bigger deal than the bond issue, as third party assets held in trust are not supposed to be mixed with the company’s assets during liquidation. The UAW basically did the same thing to the non-union employees that MF Global did to its customers.

        3. Why would a judge want do anything that might hurt his/her own pension? I assume judges get public pensions, correct?

          I know: All judges rule on the merits of a case, not whether it will fuck, I mean effect, them.

    3. Employee pay is actually pretty far down the list:….._of_claims

      1. Depends on the type of bankruptcy. A judge will recognize the need to keep some employees if there is a value to reorganization or run-off. They aren’t excepted to work for free.

        1. Those employees would then be covered under Liquidators costs or Costs incurred by an administrator and thus rank higher on the totem pole.

  7. It’s going to be quite funny once CA municipalities can longer sell bonds because they can’t get insurance.

    1. Thats what I was thinking. If lenders get fucked, they will learn and not get fucked in the future whether that is contractually guarantee their order or simply not lend the cities money. Good stuff. I can’t wait. It could be aweeome. Everybody goes broke because no one will say no to some assistant janitor who makes a 100k/year (or some similar kind of bullshit) pension.

      1. Or a lendor could say, “Sure I will back these bonds, but I want all cityt buildings as collateral.” Then watch a city get kicked out of the city. That would be cool.

      2. It’s entirely possible that Romney will pay for reducing tax rates by taxing muni bonds. And isn’t there some justice in that? Municipalities borrowed against their future to the point where they’re screwing bond holders……and get paid back with an extra 2-5 interest points on new borrowing. Sadly that hits Texas, as well as California. Life ain’t fair.

  8. I grew up about an hour away from Stockton, but hadn’t been back through it in over 20 years until a couple of weeks ago. It was a crappy place then, but driving through, it’s fairly obvious why it went bankrupt.

    There is a gleamingly new downtown area on the lake/river, complete with a new $22 million ballpark for their Class A minor league team, fancy brick crosswalks for the pedestrians to use to do their shopping in the nice new retail establishments. And there was nobody there. This part of town was empty at noon on a Friday.

    Meanwhile, you drive 5 blocks north, and it’s a ghetto (and I live in Los Angeles, so I’m familiar with ghettos). Decrepit roads, decrepit houses, and general signs of decay. To think that homes here were ever selling for $500k+ boggles my mind, and the contrast with the downtown area is jarring.

    It was a shithole when I was young. It looks like its only gotten worse. But now they’ve got a couple of nice white elephants to go along with the suckage.

    1. Ooh, I forgot to mention the $68 million indoor arena in the same area.

      1. I have a friend that paid more than $300,000 for a house now worth about $75,000. In 5 years he’s gone from a neighborhood you could freely walk at night to a neighborhood on a gang border. His fence gets tagged by one gang on Tuesday, the other gang tags over it on Wednesday. He had to put bookcases in front of the windows after a stray bullet entered the house one evening.

        I don’t think he’s been to the ballpark or the indoor stadium. But he is familiar with ‘sheltering in place’.

  9. The California tax-everything brigade will lower the bar so far that if you aren’t on foodstamps, you are taxed for being “rich”.

    1. I say we tax foodstamps. We tax unemployment benefits.

      1. Unemployment benefits are taxed. At least six years ago that was the case.

  10. Has anyone found the Republican responsible for these disasters in California? Surly that rock has been overturned!

  11. This will be interesting. If CalPers gets to fuck Assured Guaranty then why would any lender lend to any government agency? Especially one in California. What happens if the citizens of Stockton, say, “fuck you bankruptcy judge, I’m outta here.”?

    1. Just to be clear- assured guaranty is a bond insurer, not a lender- it’s going to be on the hook to make good on the bonds the city doesn’t pay. Cities have to pay a significantly higher interest rate to sell uninsured bonds.

      1. thanks for the clarification.

  12. I’m not particularly sympathetic to any idiot that would buy a municipal bond from a city selling it because it can’t meet its operating budget, but that the same idiots that ran the town into the crapper are the ones who get to choose who gets paid is beyond the pale.

    This should be pushed to a bankruptcy judge, pure and simple, and let him sort it out.

    1. Agreed. Those people deserve to get stiffed. But who has been buying that garbage anyway? I bet it’s pension funds and Obama bundlers.

  13. Atlas Shrugged: The Movie… Part 4: Stockton, CA.

  14. This is an egregious example of a failure in leadership.

    – It was ‘leadership’ that originally agreed to the unsustainable salaries and benefits in the first place.
    – It was ‘leadership’ that entered into projects and contracts they could not afford.
    – It was ‘leadership’ that let the problem grow to the point of no return.
    – It was ‘leadership’ that chose bankruptcy as a solution to their years of mismanagement.
    – And now it is ‘leadership’ that ignores the opportunity they have at hand to set things straight.

    Those in a position of leadership continue to fail the public. This decision to favor their staff and co-workers over bondholders will have widespread impact on every city, county and special district throughout California for years and years to come as they try to borrow money. No creditor in their right mind would give normal risk, let alone favorable, rates to a public entity in California knowing this.

    Stockton screwed up big time and now they’re going to impact the rest of the state for decades to come!

    It’s back to ‘business as usual’ except now your credit is trash AND you still have excessive, unsustainable benefits!! If these so called ‘leaders’ were in the private sector they would have all been fired long ago!!!

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