Pensions at heart of bankruptcy

Bankruptcy CourtApril 1, 2013

By Steven Greenhut

SACRAMENTO — Few nonlocal people typically pay much attention to the goings-on in Stockton, a hard-pressed Gold Rush-era industrial city of about 300,000 that sits in the agriculturally rich San Joaquin Valley, at the eastern edge of the California Delta. But bondholders, taxpayers and government officials throughout the country will be listening to U.S. Bankruptcy Judge Christopher Klein’s ruling, expected Monday, as he decides whether the city may remain in bankruptcy and pursue a plan that stiffs the buyers and insurers of its bonds.

If Klein sides with the city, municipalities then will face a disturbingly low bar for pursuing bankruptcy. They will be emboldened to choose Stockton’s course — i.e., using bankruptcy as a strategic policy tool to offload debts without having to confront the main reasons they went bankrupt in the first place, such as unaffordable pensions for their employees. Bankruptcy no longer will be an option of last resort. This should have an impact on bond markets.

If the city wins the case, contested this past week at the Sacramento federal courthouse, then the position of the public-sector unions and the California Public Employees Retirement System will prevail: No matter what problems befall a city, public services and taxpayers will suffer first while union members and public retirement systems are protected.

Granted, no one should feel too sorry for the lenders (and their insurers) who put money in Stockton’s pension-obligation bonds. They knew the risks that come with lending money to a city — especially one controlled by its employee unions. But their argument is strongest: A city shouldn’t use bankruptcy as a means to get rid of uncomfortable debts.

It should use this tool only when it has slashed its costs but still can’t get out from under the debt load.

$100 billion deficit

A Stockton management consultant called at the trial stated that the city would have a $100 million budget deficit in a decade if it does not receive Chapter 9 bankruptcy protection. He was supporting the notion that the city had no choice but to file bankruptcy. But how hard has the city tried to deal with its debts?

As the attorney for a bond insurer noted in his closing comments, the city intended, from the outset of this process, to shortchange the bondholders. It has refused to address its biggest debt — the payments that it owes CalPERS for its pension obligations. Stockton has only modestly pulled back employee compensation from rates far above the median for public-sector workers in California to somewhere near the average.

Essentially, the city plan has placed pension debt off the negotiating table, arguing that pension payments and benefits legally cannot be touched. A bankruptcy would be the forum to challenge that assumption, but Stockton officials have expressed no interest in doing so, figuring it’s easier to stiff Wall Street than the unions. If Stockton gets its way, then cities can spend anything on pensions, and there would be no way to ever get out from under that obligation.

Some of the most telling testimony came when bond insurer Assured Guaranty’s attorney, Guy Neal, questioned Councilwoman Kathy Miller about a July 2012 video produced to explain the fiscal dilemma to Stockton residents. Here are some of her statements from the video:

“In the 1990s, Stockton granted its employees some of the most generous and unsustainable labor contracts in the state of California. …

“Safety employees could now retire at the age of 50 …. . Many safety retirees today earn 90 percent to 100 percent of what they made when they were still on the job.”

Such retirement payouts are common among California governments. But Miller noted:

“Stockton went even further than most other cities and granted things like unlimited vacation and sick time that could be cashed out when an employee retired, and added pay categories for almost everything imaginable. … Our public safety employees were costing us on average more than $150,000 a year each.

“That’s three times more than most of us in Stockton make in a year.”

Health plan

On the video, Miller also described the “Lamborghini” health plan the city’s employees received:

“This was free medical care for a retiree and a dependent for the rest of their lives. No co-pays, no generic requirements, no HMOs, and no premiums. See any doctor, stay in any hospital, purchase any drug, and just send the bill to the city of Stockton.”

Extravagant pay and benefits are common, and not just in Stockton. The San Francisco Chronicle revealed recently that Alameda County’s top executive receives a $423,000 yearly pay package, and will for life. Total compensation for California firefighters is in the $175,000 range. Some Newport Beach lifeguards receive $200,000 pay packages.

As a friend of mine caustically observed, revolutions have been fought over lesser instances of public pilfering.

During its fiscal tribulation, Stockton pulled back on some abuses, but has left the main problem in place. Why is it OK that Stockton residents have to put up with closed parks, reduced policing and other cutbacks to protect these kinds of pensions, benefits and salaries?

Stockton leaders are floating a tax increase plan to fund police officers. But money is fungible so this should be viewed as a tax designed to pay for past boondoggles. Whatever the judge decides in Stockton’s case, it’s time for the public to stand up to these distorted priorities.

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

31 comments

Write a comment
  1. Ulysses Uhaul
    Ulysses Uhaul 1 April, 2013, 08:30

    Think moving business will pick up……don’t you just love capitalism……as someone said…….” Misery loves company.”

    Pack and Ship,

    Reply this comment
  2. Brown delta trout
    Brown delta trout 1 April, 2013, 08:44

    I didn’t know Uhaul was owned by communists?

    Reply this comment
  3. Ted Steele, Associate Prof.
    Ted Steele, Associate Prof. 1 April, 2013, 09:07

    Mr. U Haul is correct– packing and shipping saves money– no doubt about it. And with U Haul’s new modern fleet your driving will be a dream.

    Reply this comment
  4. Ulysses Uhaul
    Ulysses Uhaul 1 April, 2013, 09:09

    Aghast! We feed off capitalist whiners and sullen cubicle workers and truck stop doomers. we love to move them!

    Reply this comment
  5. stolson
    stolson 1 April, 2013, 09:35

    ha ha–it’s easier to stiff Wall St than the Unions. Guess the Unions pay off all those who make these decisions, and Wall St does not.
    So, what will happen? Just raise taxes and still curtail more services to the residents?

    Reply this comment
  6. BobA
    BobA 1 April, 2013, 10:12

    stolson:

    In case you haven’t figured it out, in California, the answer is always “there’s no problem that a tax increase can’t solve.”

    Reply this comment
  7. Ulysses Uhaul
    Ulysses Uhaul 1 April, 2013, 11:07

    Your wrong……It is for the kids!

    Reply this comment
  8. SkippingDog
    SkippingDog 1 April, 2013, 12:38

    It appears the “well pedigreed” bankruptcy judge and the law don’t agree with your suggestion that the pensions earned as deferred compensation by our public employees aren’t protected by our state constitution and laws. That’s an excellent outcome.

    Reply this comment
  9. jimmydeeoc
    jimmydeeoc 1 April, 2013, 12:58

    Doggy: “Excellent”? We shall see. This is not the bottom of the 9th. More like the bottom of the 1st. You piss off Wall Street at your peril.

    Reply this comment
  10. Scott Johnson
    Scott Johnson 1 April, 2013, 13:17

    Reading this, I have to really love living in unincorporated South Placer county. No liberals around to speak of, no city government, no unions, no crap. Just take care of your own lawn, your own area of the street, and let the world fight it out somewhere else.

    Reply this comment
  11. SkippingDog
    SkippingDog 1 April, 2013, 13:45

    What’s wall street going to do? Quit taking investment money from CalPERS?

    The judge schooled the creditors in his decision today, but didn’t even suggest that the city or CalPERS had acted unlawfully or received preferential treatment.

    BTW, Judge Klein is an expert on federal bankruptcy law, having both written the textbook for the subject and previously serving for 10 years on the BK Appellate Panel. That means he knows the law, knows the cases, and understands how the 10th Amendment prevents the imposition of a workout plan that violates state laws in a chapter 9 action.

    Reply this comment
  12. Barb
    Barb 1 April, 2013, 14:09

    This is going to be an interesting case to see what legal precedent will be made for future municipalities who are experiencing economical hardship.

    I agree with some that this isn’t over by a long shot since the battle has just begun. The judge now must decide who takes the haircuts, the bondholders, the unions, or both! A town in New Hampshire went through a bankruptcy having pensions slashed by half and left the banks unscathed but it’s going to be a long road for the city and I feel for all involved!

    It’s too bad the city was so poorly managed!

    Reply this comment
  13. SkippingDog
    SkippingDog 1 April, 2013, 14:31

    The unions in Stockton have already had a haircut, Barb. They will probably get another one in some way, but so will the bondholders and the bond insurance companies. What won’t happen is that CalPERS will take a haircut.

    Reply this comment
  14. jimmydeeoc
    jimmydeeoc 1 April, 2013, 14:34

    “The unions in Stockton have already had a haircut, Barb. They will probably get another one in some way, but so will the bondholders and the bond insurance companies.”

    Agreed.

    “What won’t happen is that CalPERS will take a haircut.”

    Yet.

    Reply this comment
  15. jimmydeeoc
    jimmydeeoc 1 April, 2013, 14:37

    Skipper…….continuing my baseball analogy, you’re like the guy whose team up up 3-0 after 1.

    “We got ’em licked now! Only 8 more innings to go!” LOL LOL LOL

    Reply this comment
  16. Brown delta trout
    Brown delta trout 1 April, 2013, 14:45

    “The creditors who challenged Stockton’s bankruptcy petition are the bond insurers who guaranteed $165 million in loans the city secured in 2007 to pay its contributions to the CalPERS pension fund.”

    Who’s going to lend Stockton money to make the next CalPERS payment Skippydog?

    Reply this comment
  17. Barb
    Barb 1 April, 2013, 15:33

    You’re right Skipping, they took a medical benefit cut but it is up to the judges now to decide! I think all parties will go through iterations of cuts until they reach a deal! Either way, all parties will suffer but I guess the bottom line is let’s hope the city has learned its lessons and goes forward towards balance. No more pie-in-the-sky promises that it can’t keep and learn to save for a rainy day!

    Some have suggested this case might reach the Supreme court docket but I would be surprised if the justices took it.

    Reply this comment
  18. Val
    Val 1 April, 2013, 16:34

    And so begins the wave of Muni crashes…

    Reply this comment
  19. Bill - San Jose
    Bill - San Jose 1 April, 2013, 16:37

    Here Here Steve!

    This judge hopefully realizes that the city must kill its current contracts with the thug unions and pay out the bondholders as well as possible.

    But again, it will come down to whether or which insurer comes back for more. You have to hope none come back. This will force the city to insure itself and that alone will really force them to oversee their own abuses. Self policing to the rescure when it hurts your neighbors.

    Reply this comment
  20. SkippingDog
    SkippingDog 1 April, 2013, 20:03

    Sorry, Jimmy. The more accurate metaphor would be 3-0 in the top of the 9th. The bankruptcy court has now created the original record that will be used in any and all subsequent appeals, and Judge Klein has clearly identified the deficiencies in the creditor’s case on the record.

    It’s always possible that there will be some unanticipated sea change in the law, but it is also good to remember that Judge Klein spent ten years on the Bankruptcy Appeals Panel, wrote the primary text for bankruptcy law, and is the chief judge of the bankruptcy court in which this matter was heard. It’s not likely that he has or will make any mistakes, and the smart money would be on him having a thorough and complete understanding of the law.

    Reply this comment
  21. SkippingDog
    SkippingDog 1 April, 2013, 20:05

    Stockton doesn’t need to borrow money to make their CalPERS payments, brown trout. The money they borrowed was to pay down their existing CalPERS obligations at a lower rate, which is why pension bonds were created in the first place. The ongoing CalPERS payments will be paid from the general fund, as they usually are.

    Reply this comment
  22. Andrew
    Andrew 1 April, 2013, 21:21

    In light of the Judge’s ruling, will Stockton be required to increase it’s pension payments to Calpers by the required 33-50% over the next 6 years that Calpers has been proposing for state and local agencies?
    If they cannot afford to pay it, will they borrow it? Or will they have to get it via further increases in resident parcel taxes and/or contributions from employees?

    Reply this comment
  23. Bob Smith
    Bob Smith 1 April, 2013, 21:37

    “That means he knows the law, knows the cases, and understands how the 10th Amendment prevents the imposition of a workout plan that violates state laws in a chapter 9 action.”

    Really? How is that, exactly? Bankruptcy is a power granted to the Federal government (Article 1, Section 8, Clause 4), not the states. Since it’s an explicit grant, the 10th Amendment is irrelevant, because the 10th only governs unenumerated powers. State law is irrelevant unless explicitly made relevant by Congress. If Federal law lets state law control which contracts may be voided in a municipal bk, then Stockton is screwed 10 ways from Sunday. If not, then its pension contracts are as subject to being voided as any other debts.

    Reply this comment
  24. SkippingDog
    SkippingDog 1 April, 2013, 23:13

    Well, Bob, Chapter 9 of the Bankruptcy Code was established by Congress pursuant to Art.1, Sec. 8, et. seq. of the Constitution. Chapter 9 is the only chapter of the BC available to municipalities and has significant differences from Chapter 11, so you might take a few moments to read up on it.

    One of the major differences is that Chapter 9 recognizes the limitations on federal courts required by the 10th Amendment. You could do the research yourself, but I’ve attached a nice primer for you to educate yourself with.

    Enjoy!

    http://www.afgi.org/resources/Bankruptcy_Primer.pdf

    Reply this comment
  25. SkippingDog
    SkippingDog 1 April, 2013, 23:46

    BTW, Bob, the obligation Stockton has to CalPERS isn’t a “contract” in the normal sense. It’s a “statutory lien.” Be sure to look for that term in the primer when you read it.

    Reply this comment
  26. Ulysses Uhaul
    Ulysses Uhaul 2 April, 2013, 07:06

    Relax. You pay no matter what goes down…..your ruled not represented…….you should just Pack and Ship with us…..we treat ya “right.”

    Reply this comment
  27. Brown delta trout
    Brown delta trout 2 April, 2013, 08:49

    Skippy may be right. If we look at Detroit as an example then it certainly can mean that union pay, pensions and benefits trump everything else. But at what cost to society? Maybe this will be the beginning of the business Exodus from California. Long live governor Pharoah, king of the government unions!

    Reply this comment
  28. Ulysses Uhaul
    Ulysses Uhaul 2 April, 2013, 10:08

    Trout…..will give you some free moving boxes….

    Reply this comment
  29. The Africanized Swarm of Ted Steele System
    The Africanized Swarm of Ted Steele System 2 April, 2013, 10:17

    Skipper– Move to the head of the class– you are 100% correct about the record on appeal AND chapter 9……

    Reply this comment

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HMOspensionsSteven GreenhutStockton

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