Pension Crisis

Calif. Employee Pensions Are Not Sacred Cows, Judge Rules. But Don't Call the Slaughterhouse Just Yet.

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Underwater figuratively, not literally (so far)
Credit: LPS.1

Public sector unions in California have used their enormous clout to protect their plum pensions, making it nearly impossible for municipal governments to scale back benefits in any way shape or form (even for employees they hadn't even hired yet). Even as California cities file for bankruptcy, unable to pay off various creditors, the California Public Employees' Retirement System (CalPERS) has argued that debts owed to them are special and off the table. They cannot be reduced or severed, even in the case of bankruptcy.

And then yesterday U.S. Bankruptcy Judge Christopher Klein's told CalPERS it was wrong. In the case of a bankrupt city, pensions can be cut just like any other debt. That's what the bankruptcy process is for. As The Sacramento Bee explains, the ruling came because a creditor in the bankruptcy of the city of Stockton, Franklin Templeton Investments, is upset that it's only going to get a ninth of what it's due and wants a better deal, and that might come from money going to pensions.

It's important to note that this ruling doesn't require Stockton to cut pensions. Their current bankruptcy reorganization plan maintains the status quo there, to the tune of $29 million a year. Klein will rule on this plan at the end of the month. Certainly, though, Klein's ruling should be seen as a warning to Stockton that he might not allow the city to favor some debtors over the others to the extent that it's doing with CalPERS.

Reason contributor Steven Greenhut has written extensively about Stockton's financial woes, both here and at the San Diego Union-Tribune. He looked over Stockton's plan and noted that a failure to rein in pension costs as part of its recovery could put the city back into insolvency within four years. Read more here.

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  1. Even as California cities file for bankruptcy, unable to pay off various debtors, the California Public Employees’ Retirement System (CalPERS) has argued that debts owed to them are special and off the table. They cannot be reduced or severed, even in the case of bankruptcy.

    And yet when it comes to the unbankruptability of federally-backed student loans it’s all a plot by the “banksters” to rob the youth of America.

    1. Of course, that’s the government at work again, because the lenders didn’t make those loans nondischargeable. And before any leftwing wacko starts talking about influence, why do we still have bankruptcy if the lenders are calling the shots in DC?

      1. Obviously its because the well-meaning Democrats instituted this policy (and not, you know, carried over from Common Law) have prevented the evil Teathuglicans from removing bankruptcy protections.

  2. They cannot be reduced or severed, even in the case of bankruptcy.

    So, someone who’s having a better stock week than I am please essplain to me, how is any debt off the table, when by definition, you have no money*?

    *Yes, I understand that at some point, you may have some assets you may liquidate to cover secured debts etc., but at some point, if your remaining debts still exceed your assets, what then?

    1. I don’t think anybody is having a good stock week. I got raped on my energy fund, and then they charged me a .25% exit fee. I feel othered.

      1. I own a bunch of puts on the SPY at a $194 strike price. Cue the music… “We’re in the money!”.

        I have nearly zero equity exposure and am sitting on 50% cash.

        Please let this be a big crash…

        1. Trying to time the market is silly…

          1. Silly, yes. Fun, yes. Lucrative, hopefully.

          2. “Trying to time the market is silly…”

            Agree entirely.

            Especially if you don’t spend all day, every day, observing the markets.

            I do. It’s my job.

            When most market signs point to insanity (probably something to do with reckless money printing), I’m going to keep my personal assets on the sidelines. The expected return doesn’t justify the risk.

            And when equity markets are making new highs and the VIX is making new lows, that’s usually the time to buy puts.

            1. “Especially if you don’t spend all day, every day, observing the markets.

              I do. It’s my job.”

              That’s a conceit that’s been disproven time and again in the real world.

              Good luck.

              1. Agree again. Most active investors underperform the market, especially after you consider transaction costs, fees and taxes.

        2. My plan is a little more complicated than that. It involved living on a tropical island, eventually.

            1. It does now.

    2. The issue is priority among creditors.

      Secured creditors have direct claim to specific assets.

      Senior unsecured creditors get first dibs on whatever’s left.

      Subordinated creditors usually get the shaft.

      But the priority of creditors is set out in the loan agreements… it has nothing to do with “we’re a pension fund and deserve a higher priority”.

      1. NO, I get that. I understand the difference between secured and non-secured creditors. What happens to the secured creditors if there’s still no money?

        1. No money, no assets to liquidate, no payee.

          1. Right, and since the pension fund is probably the largest unfunded, ongoing, persistent debt the government has, secured or not, they can’t possibly pay it, correct?

            1. They can’t, no. We can, though, with magical infinite money.

              1. And he screams back, “You’re a cow
                Give me some milk
                Or else go home”

      2. I suppose I should have been more clear when I asked how ANY debt is off the table. Made it sound like I didn’t understand the secured/non-secured creditor thing.

        Although our next generation won’t understand because Obama didn’t. Or he did and just didn’t give a fuck.

        1. My money’s on the latter.

          Also, saw a crash coming at least a month ago and liquidated; have just been waiting to buy in. Gonna give it another week to settle down.

          1. I “saw” a crash coming several months ago. I’ve been wrong the entire time.

            And I might still be wrong.

            But I’m willing to take that risk.

    3. *Yes, I understand that at some point, you may have some assets you may liquidate to cover secured debts etc., but at some point, if your remaining debts still exceed your assets, what then?

      You actually think the people who made this mess have any sort of grasp on reality? They’re economic illiterates.

    4. *Yes, I understand that at some point, you may have some assets you may liquidate to cover secured debts etc., but at some point, if your remaining debts still exceed your assets, what then?

      You actually think the people who made this mess have any sort of grasp on reality? They’re economic illiterates.

    5. Because government employees have grown accustomed to sitting on their ass and cashing large checks. And their bosses are well connected. And it feels unfair to people that proggies like so it must be unconstitutional.

    6. Your premise is flawed. The city always has quite a bit of money coming in through taxes. So there’s always enough money to pay the pensions, if you cut all the other services deeply enough.

      Granted, doing so would be bad for the citizens of the city, but CalPERS isn’t willing to take a hit to protect them.

  3. “unable to pay off various *debtors*”

    “the ruling came because a *debtor* in the bankruptcy of the city of Stockton, Franklin Templeton Investments”

    I’m fairly sure you mean *creditors*.

    1. It is California, after all.

    2. Siiiiigh. I blame my cold. Which I picked up at that CityLabs conference as a final insult I guess. I will fix.

      1. THAT IS NO COLD!!! EBOLA HAS COME TO REASON!!!!1!1!1ELEVENTY!

        1. Since that conference involved hundreds of city leaders and mayors from around the world, that would put my at ground zero for the apocalypse.

        2. Swiss? Really?

          You only just now figured this out? Didn’t the fact that an anagram for Elizabeth Nolan Brown was “Ebola Bra Ninth Low Zen” tip you off to this earlier?

      2. Hey Scott, looking forward to your stories about CityLabs conference. And don’t be shy, man. Really geek out and write a bunch of stuff. I’d be very interested to see your perspective.

        1. I’m not sure if you’re being sarcastic or not. Did you see my thing from yesterday?

          1. No sarcasm. I didn’t see your piece from yesterday.

            I am really interested in the subject, and interested in your/a libertarian perspective to urban development, cities, etc.

            1. Take a look then. I spent all morning yesterday hammering out 2,500 words about it. ReasonTV did a few interviews as well, but I’m not sure when those will go up.

  4. Pensioners really should be in line at the bankruptcy window before bond investors–although I bet the bankruptcy judge looks closely at any new rounds of pension or salary raises that were stacked on after Templeton took on that debt. …on the other hand, they may have taken on that debt, in part, specifically to make some further employee compensation possible.

    Anyway, taxpayers in California don’t need Wall Street loaning cities that can’t pay their debts more money to spend any more than we needed Wall Street to extend loans to deadbeat homeowners.

    1. Then perhaps pensioners should ensure that their pensions aren’t unsecured.

      Its not impossible to do that, just not normal practice.

      1. I agree that pensions shouldn’t be completely protected from bankruptcy proceedings–especially when you’re dealing with an entity like a city that really can’t be completely liquidated.

        There’s no question this city is going to survive, and the unions shouldn’t be able to negotiate a contract so bad that it both bankrupts a city–and survives intact to bankrupt the city again.

        But it’s just like a private corporation in bankruptcy. Imagine a private corporation negotiating with lenders, having the lenders look over the corporation’s finances and deciding that it’s worth it to lend to this doomed entity–because they can simply help themselves to the employee’s pensions once the corporation is in bankruptcy court.

        That’s not fair either.

        The bankruptcy priority rules as generally understood are more or less as they should be.

        http://www.law.cornell.edu/uscode/text/11/507

        Saying that pensions are so sacred they shouldn’t even appear on the list and shouldn’t ever be discharged is ridiculous–but they should be on the priority list somewhere. …otherwise lenders wouldn’t take them into consideration when lending.

        It’s a good thing when lenders get burned for making bad loans–to cities with out of control pension obligations for sure. It’s good for the taxpayers.

        1. That’s not fair either.

          I disagree, Ken. It’d make employees realize that maybe they should just take increased pay rather than risking their retirement to a company that might go broke.

          It’d also help chip away at the concept of “too big to fail;” less of the appeal-to-emotion ploys of “but those GM workers could lose their pensions!”

          1. It would make employers free to borrow money at their employees expense.

            It would make lenders stop taking employee pensions into consideration when they’re doing their underwriting.

            I see what you’re trying to do. What you’re proposing wouldn’t do what you think.

            It would certainly be much, much worse for the taxpayers. Lenders would have less reason not to lend to cities with outrageous pension obligations. And cities won’t do anything to reign those obligations in until lenders cut them off.

        2. Lenders can’t “help themselves to the ….pensions” if the pension plan isn’t senior. It just means that the pensions sit with other unsecured creditors. There’s nothing fair or unfair about who sits where in the security ladder – it’s whatever everyone agreed to when they decided to lend money. If anything’s unfair, it’s the CALPERS argument that public employee pension plans should enjoy a status superior to that of private pension plans, for no reason other than “because.”

    2. Pensioners really should be in line at the bankruptcy window before bond investors

      Fuck no!

      The idea is to DISCOURAGE people from wanting government jobs in the first place.

      1. This wouldn’t just apply to government workers. And regardless of whatever else you’re trying to accomplish by relieving employers of the burden of paying their employees what they worked for…

        The idea is to discourage lenders from lending governments more money to spend without reforming their ridiculous pension schemes–which is what’s forcing these cities into bankruptcy in the first place.

        If pensions weren’t ahead of less senior debt in line at the bankruptcy court window, then the underwriters wouldn’t have to think about pension costs at all when they were thinking about whether to lend.

        Again, the only reason such cities will slash pensions is because lenders cut them off and won’t extend them any more credit. If a city is in bankruptcy because of their ridiculous pension scheme, and the lenders didn’t have to take account of the fact that the pension people were going to be paid first, then they might never stop lending such cities more money.

        Why would we want bankrupt cities to have another supply of credit without any incentive to slash pension costs?

        1. Yes, to the extent that pensions are unsecured, it would decrease the risk for lending that is senior to the pensions. But the risk of lending that is the same security level as the pensions would be unaffected. And it would increase the risk of the pension “debt.” The total risk level for all lenders would be unaffected. So theoretically, the total willingness to lend, including the willingness of pensions plans to accept pension obligations, shouldn’t be affected. Although, if the theory were to manifest itself in actual practice, it would undoubtedly take time for this to shake out, assuming this pension decision holds.

  5. Look, many states can’t pay these debts. There’s only one entity that operates with total disregard to revenues and debt. That’s the entity that will attempt to pay.

    1. Yup. It’s not about getting blood from a stone, it’s about raising enough of a stink that Allfather Obama bails them out.

      1. Obo may owe the CA D’s something, but he really has no need to pay.
        They’d thank him if he spit each one of them in the face; no need to waste assets here. Spend it where the D’s are threatened.

      2. Is there even the slightest doubt that this is the plan? Whether it happens now or later, they expect–probably correctly so–that the federal government will bail them out.

        And don’t be surprised if the GOP ends up going along with pension bailouts.

  6. While we’re discussing the Peoples’ Republic of CA, you must know that facking isn’t safe! We know this because the staff can’t read all the required reports!

    “Cracks seen in fracking-disclosure report process”
    […]
    “A recent California law that requires oil companies to disclose key details of fracking operations has so far failed to ensure that all the required information reaches the public.
    […]
    And the regulators ? with the state’s Division of Oil, Gas and Geothermal Resources (DOGGR) ? don’t have enough staff to process all the reports they’ve received.”
    http://www.sfgate.com/business…..hc-bustech

  7. Confucius say, sacred cows live in India.

  8. Yeah, well – fuck California

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