Bankruptcy no panacea for pensions

Aug. 20, 2012

By Steven Greenhut

SACRAMENTO – 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 the wisdom of lending money to cities.

The struggling port city of Stockton has declared bankruptcy after a spending spree where officials granted city 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 — by selling bonds — to cover the mess it created by its pension increases. Now the city government is as upside-down as many Stockton homeowners, and officials are blaming the foreclosure crisis, conveniently neglecting that the current reduction in property tax revenue followed years of dramatic revenue increases.

Now, Stockton officials want to stiff Assured Guaranty, a 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 Employees 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 City Manager Bob Deis accused Assured Guaranty 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 following policing cutbacks.

But it’s not the fault of lenders that city officials were so unconcerned about their residents that public safety concerns were placed behind the demands of wealthy city pensioners. Like many cities in this state, Stockton’s infrastructure is crumbling as government becomes more a benefit provider to current and retired city employees.

Deis sounds like a wastrel who spent 10 years running up debt on luxurious living, then gets mad at his bank for wanting to get paid back: “Hey, you don’t care that I can’t feed my kids!”

CalPERS arrogance

Of course, it’s hard to top the arrogance of 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 investment returns that essentially required the Dow Jones industrial average 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 can expect to see more local officials faced with the choice of 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 court papers that CalPERS is conspicuously missing from the list of those Stockton engaged in pre-bankruptcy negotiations.”

That insurer argues persuasively that Stockton never had any intention to seek reduced payments from CalPERS. Typically in bankruptcies, the debtor can’t pay everyone what’s owed, so then the creditors fight it out. Here, it seems like city officials cherry-picked which creditors to stiff, which certainly backs the insurer’s contention that Stockton officials have showed bias, a distortion of the bankruptcy process.

While the municipal 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.

SEC warning

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.” The SEC 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 valuable 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 this week that the state’s largest city faces “disaster” if officials there don’t fix L.A.’s underfunded pension system.

We should closely watch the unfolding proceedings in Bankruptcy court, as Stockton goes through this process. But a more significant battle is being fought in San Jose, as courts determine whether voters’ support for a June ballot measure that cuts pensions for existing city workers is legal. The key is pensions for current workers, given that simply cutting retirement benefits only for new hires 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 even 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 municipal bond holdings, which will become an even bigger target.

Steven Greenhut is vice president of journalism at the Franklin Center for Government and Public Integrity. Write to him at: [email protected]

16 comments

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  1. Rex the Wonder Dog!
    Rex the Wonder Dog! 20 August, 2012, 11:47

    The BK court will not go along with CalTURDS wants on this, just will not happen. The court will rule that CalTURDS will take hits just like everyone else will. What CalTURDS should have done was negotiate a way to cut the pay of the most abusive pensioners-like the police chief who worked 8 months and is pulling down $204K per eyar at age 52 while being employed as a cop with the DA for another $100K.

    The BK court will look to EQUITABLE solutions, and allowing HS educated cops at age 52 $10 million pensions while everyone else gets stiffed is not equitable and will not fly.

    I guarantee it and I am always correct in my predictions. Ask Teddy or his sock puppets.

    Reply this comment
  2. Jay
    Jay 20 August, 2012, 11:49

    I just wonder how this can be resolved without screwing over people like me who are vested in the system and counting on the PERS pension. Not every current or former PERS employee is gaming the system and raking in big bucks; the most scrutiny needs to be directed to the top management in each agency who get paid princely sums for their desk ‘work’ and often charge for overtime exceeding their regular pay.

    Reply this comment
  3. Ulysses Uhaul
    Ulysses Uhaul 20 August, 2012, 13:25

    Jay. You deserve your pension and your honest work and personal planning should not be betrayed by fiat!

    There are a few greedy/unhappy posters uncomfortable with their personal lives and careers….ignore them….keep helping Californians.

    Reply this comment
  4. Rex the Wonder Dog!
    Rex the Wonder Dog! 20 August, 2012, 13:30

    People like you Jay are not the problem and will not be a solution.

    You are not the one endangering the systems future. What you will see is exactly what you would see with the PBGC, there will be a cap on pensions, at the PBGC it is $54K, there is a 65 or higher age to receive the max of $54K, and if you retire earlier than 65 the pension will drop drastically.

    Reply this comment
  5. rightwinger
    rightwinger 20 August, 2012, 13:31

    Jay… there are a lot of hard working public sectors workers out there, no doubt about it but I guess everybody better start saving some of that real nice salary you get just like the rest of us who have to save for retirement. No one is contributing to my 401K, just me…and that is the way is should be. Some people honestly think they paid their fair share when most did not even cough up the lowly 8% employee contribution… no the EMPLOYER did that for them… NOT FAIR TO THE TAX PAYERS WHO END UP NOT ONLY TRYING TO SAVE AND SCRIMP FOR OUR OWN RETIREMENTS BUT NOW OUR TAXES WILL GO SKY HIGH TO PAY FOR SOMEONE ELSES’ RETIREMENT. SOON WE WILL HAVE NO SERVICES…CAN’T AFFORD TO PAY ANYONE AS ALL THE MONEY WILL GO TO THE CORRUPT CALPERS MACHINE FOR THOSE ALREADY RETIRED AND MAKING MORE THAT WHEN THEY WERE WORKING…. WE ARE JUST SLAVES NOW!!

    Reply this comment
  6. Edward Steele, Chief Investigator
    Edward Steele, Chief Investigator 20 August, 2012, 15:58

    Well said Jay and uhaul!!!!

    I think what Greeny is starting to realize is what I told him years ago— ALL US civil law is turned on its head when one ignores a contract– can’t do it.

    The relef the cities want is at the bargaining table becauase we are a nation of laws.

    Reply this comment
  7. Rex the Wonder Dog!
    Rex the Wonder Dog! 20 August, 2012, 16:53

    I think what Greeny is starting to realize is what I told him years ago— ALL US civil law is turned on its head when one ignores a contract– can’t do it

    BK court can break contracts Teddy- so you too must FOLLOW the law, the law the BK court lays down.

    Reply this comment
  8. Ulysses Uhaul
    Ulysses Uhaul 20 August, 2012, 19:05

    Poodle if they cut your pension at the truck stop you will freak out!

    Reply this comment
  9. Rex the Wonder Dog!
    Rex the Wonder Dog! 20 August, 2012, 21:07

    BK court can CUT pension contracts, remember that baby Einstein 🙂

    Reply this comment
  10. Bob Smith
    Bob Smith 21 August, 2012, 01:26

    “Not every current or former PERS employee is gaming the system and raking in big bucks”

    Please define “big bucks”. Are making a ~$50k pension? If so, you’re a bona fide inflation-protected millionaire.

    In any case, whether you’re gaming the system or not is irrelevant. There’s no money to pay you. Accept a haircut now, or watch the whole system collapse.

    Reply this comment
  11. mike mortenson
    mike mortenson 21 August, 2012, 05:31

    this is about cities no being able to pay their employer share of contributions and cities not being able to pay bond holders. the current retirees paid there share for 20 to 30plus years and the greedy rich dont make hard working nurses, teachers, police and fire fighters bad and evil greedy pensioners.i made 4k a month when i retired and get 3000 in total ss and calpers with 33 years of work. most of us are in that or lower levals and the state, cities and counties only matched our contributions out of our pocket like any investment payroll deduction.prosecute and remove all the absurd people in the system but dont propogandize our investment just because you dont have a pension or never paid or planned for retirement yourselves. we that are well into retirement dont need government taking our money for 30 years trying to come up with criminally distorting justification for removing social benefits we paid and worked for.in canada all get free medical care and retirement people are not trying to figure out how to keep systems they stole from for years or gave as a way to get employees in overworked substandard state hospitals and dangerous occupations they competed for. how criminal to take a persons life of work for a promise then try to figure out how to not pay them. thats closer to slavery if u think about it. pay banks trillions then attack social systems for money?…hey!..print some money and rescue the middle class, cities and pensions not banks because if we dont have money neither will the criminal banking system!

    Reply this comment
  12. mike mortenson
    mike mortenson 21 August, 2012, 05:39

    EXCUSE ME FROM A CALIFORNIA RN!excuse me for trusting in my governments promise of safe retirement while i saved your lives and concentrated on helping others instead of concentrating on getting rich and just give me my pension which i rarely have 100dollars left at the end of the MONTH. EXCUSE MY COWORKERS WHO DIED AT WORK IN STATE SERVICE, EXUSE THE DEATH OF OUR SONS AND FRIENDS FOR THE SAME COUNTRY I TRUSTED. thankyou. BY THE WAY,..
    WHERE ARE YOUR BRAINS?

    Reply this comment
  13. the Rt Rev Ted Steele
    the Rt Rev Ted Steele 21 August, 2012, 07:06

    tired old mantra—–

    Reply this comment
  14. Rex the Wonder Dog!
    Rex the Wonder Dog! 21 August, 2012, 13:25

    Mike, wake up lil buddy, your trough feeder spin will not work here, 1) you didn’t pay jack towards your retirement, 2) it was all picked up by the taxpayer, 3) and you were getting COLA’s of 3%-9% per year while your pensions were jacked by as much as 50%, 4) while at the same time private sector employees-the real workers who compete in the free and open market- saw their wages decline. 5) Average salary for CA is $29K per year-it was $31K in 2000, yet cop and FF pay went up 97% from 2001-2011.

    Please Mike, get serious, for once 🙂

    Reply this comment
  15. Edward Steele, Chief Investigator
    Edward Steele, Chief Investigator 21 August, 2012, 15:24

    Mike—- Even though Rex the Poodle is waaay off on his facts— what he means is this–

    even though you lawfully contracted for your compensation and preformed the contract as required, he now wants to deny payment to you in violation of the very basic notions of contracting contained in the commerce and contracts clauses of the US Constitution because it has become inconvenient.

    Don’t worry. The entire constitutional notions underpining commerce and contracting are on your side. Courts consistently uphold it of course. While these tea baggy folks have been shown that over and over again in courts all over the US, their tiny light bulbs have yet to go all the way on. They still want to feed the lawyers a bit more.

    It’s been fun watching them lose battlem after battle.

    Ted

    Reply this comment
  16. Rex the Wonder Dog!
    Rex the Wonder Dog! 22 August, 2012, 02:22

    LOL truth hurts Teddy/Queeg/Uhaul 🙂

    Reply this comment

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