Ill-informed Judgment on Stockton Pensions in Bankruptcy

A judge ruled yesterday that the city of Stockton can go bankrupt.  Next up, what happens to the pensions of Stockton retirees and employees.  Some judge will decide that in the near future without, in all likelihood, possessing the two most pertinent pieces of information.

  1.  Stockton making their $900 million payment to CALPERS will not secure benefits in a plan with an $87 billion deficit that has made no significant inroads into curbing benefit accruals.  Weak investment returns, retirees living longer, and active participants getting better at gaming the system will surely increase contribution requirements in future years.  A judge may rule that Stockton taxpayers can afford a $900 million hit in 2013 but what about the $2 billion hit in 2018?  The judge is unlikely to be presented with an honest projection of costs from the fantasyland that is public pension funding.
  2. What will CALPERS do if Stockton shortchanges them?  Will they cut benefits for current and future Stockton retirees?  Will they reduce all obligations proportionately throughout the system?  Will they pout?  Without a process in place like we have in the private sector with the PBGC CALPERS can pretty much claim the right to do anything.  If a judge decides that bondholders will only get 17% of what is due them then bondholders will get 17% of what is due them (assuming no appeal and not accounting for legal fees).  If a judge rules that CALPERS won’t get all of their $900 million then it’s still anyone’s guess what Stockton retirees will get.

In theory our legal system is supposed to work beautifully.   An unbiased arbiter decides on the merits of a case as presented by various opposing parties.  Anything outside of that presentation is to be disregarded, even the truth.

12 responses to this post.

  1. Posted by Tough Love on April 2, 2013 at 5:50 pm

    John, You make an excellent point in your #1 above. The Bond Insurers should (so as to make their figures appear respectable and not biased) present funding requirement projections using Moody’s new criterion, the goal being to show that the pensions (as currently structured) will NEVER be affordable and MUST be reduced.

    And, as you said in your #2, it certainly would be helpful to the Court to understand WHAT would happen IF CalPERS gets less than the full 100% Stockton currently owes.


  2. Posted by MJ on April 2, 2013 at 6:17 pm

    and somebody who gets to be a judge and presumably smart enough to get through law school can’t figure any of this out himself or is the judge part of the ponzi scheme too?


    • One of the more perverted aspects of our justice system is that the judge is supposed to disregard all evidence not presented to him. I’m not sure if any party knows enough (or has an incentive) to present either point.


    • Posted by Tough Love on April 2, 2013 at 8:47 pm

      Re-stating funding ratios and funding requirements at say 5.5% (or even 4% as University Professors suggest as most appropriate) vs the 7.5% CalPERS uses for discounting Plan liabilities is not even remotely a skill a judge would have. It’s takes knowledge and training …. not just intelligence.

      Would you hire a doctor to fix an electrical wiring problem in your house (if he charged no more than an electrician) ? While I’m sure he could learn how, it’s highly unlikely it’s part of his skill sets.


      • Posted by MJ on April 3, 2013 at 6:58 am

        It would seem to me it is common sense and these types of issues are splashed across every major newspaper and blog site. Wouldn’t take much to read a little and let it rattle around to at least start asking questions. Just saying….


  3. Posted by MJ on April 2, 2013 at 8:38 pm

    Hopefully, the municipal bond lawyers will but I guess that might screw them too.


  4. Posted by George on April 4, 2013 at 3:52 pm

    since the people who financed the fiasco were the bondholders I think it is fair they lose. I also think it will be easier and safer to screw them than the Police.


    • Posted by Tough Love on April 4, 2013 at 4:43 pm

      It may be easier and safer to screw the bondholders than the Police, but it certainly isn’t fairer.

      Did the Bondbuyers collude with anyone to get higher than market rates ?

      Now ask yourself, did the Public Sector Unions/workers collude with the politicians to trade campaign contributions and election support for favorable votes on pay, pensions, and benefits …. and were the Taxpayers’ interests fairly represented in such deals ?


      • Posted by Anonymous on April 5, 2013 at 1:00 pm

        If the bond holders didn’t conduct their due diligence in these dealings then they deserve to be screwed. If the publics did not do their due diligence in a basic math problem then they deserve to be screwed as well. Reality bites and it doesn’t differentiate between police, bond holders or anyone else. Hair cuts are needed all around and if the publics think they are safe in these games of chance they are clearly living in la la land but after all it is CA!


  5. Posted by muni-man on April 5, 2013 at 2:08 pm

    It sure seems like the tea leaves are lining up against CALPERS by reading the judge’s comments:

    Klein proceeded to explain that the whole purpose of federal bankruptcy laws is to permit the impairment of contracts or, more specifically, to permit the debtor to get out from under contractual obligations. “It follows, then, that contracts may be impaired in this Chapter 9 case without offending the Constitution,” Klein wrote. “The Bankruptcy Clause gives Congress express power to legislate uniform laws of bankruptcy that result in impairment of contract; and Congress is not subject to the restriction that the Contracts Clause places on states.”

    No matter what happens, this issue is probably gonna be fast-tracked right up to the USSC. In the end, I think (a) ability to pay (b) creditor fairness and (c) the negative impact on financial markets and future funding if bondholders get stiffed will outweigh the need to keep pensioners whole. If nothing else though, I think it’s already pretty clear that contract law and CA constitutional issues will be taking a back seat to Fed bankruptcy and supremecy laws. That’s a big blow to CALPERS and any other public pension plan if they have to play in the Fed’s sandbox and not in their own, and greatly increases the likelihood of unfavorable outcomes for publics.


    • Posted by George on April 6, 2013 at 7:54 pm

      FWIW, when Vallejo went bust it was creditors that took the biggest hit and then non public safety employees. Unlike Vallejo stockton creditors financed all sorts of silly things like a minor league baseball stadium and even bought pension bonds. So I think creditors deserve to lose on this one.


      • Posted by Tough Love on April 6, 2013 at 8:21 pm

        George, From your 2 comments its certainly sounds like you are a Public Sector worker “protecting your turf”. Comments on these boards will matter little … although hopefully our efforts have helped wake up main stream media and let the politicians know that they are being watched..

        Whether these pension (and benefit) promises are paid in full, in part, or not at all, will depend on whether there will be sufficient money to pay for the extraordinarily generous promises made by politicians with other people’s (the Taxpayers’) money.

        I don’t think there will be sufficient money. Do you ? If so, where (or from who) do you believe it will come from ?

        FYI, the pensions were not reduced in Vallejo bankruptcy for 2 reasons:
        (1) The city council was STILL Union controlled, and
        (2) CalPERS threatened very long-lasting and costly litigation, money the city did not have. In the Stockton Bankruptcy, there are deep-pocketed Bond Insurers who are financing the battle.


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