News

Bond insurers vs. Stockton vs. CalPERS

Bond insurers who want CalPERS to share the financial pain of the Stockton bankruptcy do not answer a key question in lengthy court filings: How would “bloated” and “overly rich” pensions be cut?

 

The insurers backing $250 million worth of Stockton general fund bonds argue that the city’s bankruptcy plan gives them major cuts but spares the largest creditor, CalPERS, whose annual bill to the city is expected to nearly double in the next 10 years.

 

During a 90-day mediation with creditors required under a new state law before filing for bankruptcy, Stockton did not negotiate with CalPERS, say Assured Guaranty and National Public Finance Guarantee.

 

Instead, National said in a filing last month, Stockton chose “to protect the unsustainable CalPERS pensions that it awarded, but that the city itself cannot now afford, while forcing its other creditors (including National) to foot the bill.”

 

How negotiating with the California Public Employees Retirement System before filing for bankruptcy would be expected to significantly cut Stockton’s soaring pension costs is not clear.

 

CalPERS has served notice, notably in Vallejo and San Bernardino, that it will dip into its deep pocket for an all-out legal battle to prevent bankruptcy from being used to cut pensions.

 

Stockton does not want to cut pensions, arguing that its proposal to eliminate retiree health care is how debt reduction in bankruptcy is shared by employees, who are the actual creditors while CalPERS is just the middleman.

 

The federal bankruptcy judge handling the case, Christopher Klein, told a UC Berkeley conference the court cannot impose a plan to adjust debt, but does rule on eligibility for bankruptcy and whether the plan to adjust debt is fair to creditors.

 

The judge appointed a mediator in August, U.S. Bankruptcy Judge Elizabeth Perris, to meet with creditors in an attempt to reach a “consensual plan of adjustment.” An eligibility hearing, originally scheduled Jan. 8, was pushed back to Feb. 26.

 

Filing for bankruptcy in June gave Stockton an automatic stay on debt collection. Now in the view of some, the creditors will lose much of their leverage if Stockton is found to have met the eligibility standards required for bankruptcy.

 

The carefully structured Stockton bankruptcy plan appeared to be following the Vallejo model, where the main cuts in bankruptcy were to retiree health care and bond debt.

 

In addition to facing heavy losses if they have to pay bondholders, the insurers may fear a trend that could affect their industry and the bond market. Stockton has responded to the bond insurer decision to contest the city’s eligibility for bankruptcy.

 

The insurers say it was not until they contested eligibility that the city met with a consultant to develop a “business case” for not impairing CalPERS and inquired about cutting an unusually generous 5 percent cost-of-living adjustment for pensions.

 

And it was not until Dec. 4, say the insurers, that Stockton asked CalPERS for a “hardship” rate reduction, which could save the city $1.25 million this fiscal year and a total of $4.5 million over three years.

 

The hardship rate would give Stockton some short-term relief, but presumably increase the long-term debt. The annual city CalPERS payment, $16.8 million this fiscal year, is expected to be $30.2 million in fiscal 2020.

 

Movement by CalPERS seems unlikely. The state constitution (amended by labor-backed Proposition 162 in 1992) makes the CalPERS top priority protecting pensions. Minimizing taxpayer costs, which had equal standing, became a secondary priority.

 

A 17-page statement issued by CalPERS last July spelled out the widely held legal view that a series of court decisions mean pensions promised on the date of hire are “vested” rights, protected by contract law, that can be cut only if offset by a new benefit.

 

Beyond the legal obstacle, CalPERS only administers pensions: collecting, investing and paying out the money. Pension amounts are set through legislation or, before reform legislation for new hires last year, bargaining with public employee unions.

 

If CalPERS were given a fair share of Stockton debt reduction, a financial “haircut” along with other creditors, how would CalPERS pass that along to the Stockton employees and retirees?

 

Some guidance might come from procedures used when private-sector pensions fail and the federal Pension Benefit Guaranty Corp. takes over pension payments. But it’s not mentioned in the bond insurer court filings last month.

 

The Assured Guaranty filing last month cited testimony from a city official who said she was unaware of any attempt “to study alternative benefit structures with other pension administrators or agencies” to replace CalPERS.

 

“Nor did the city ever consider withdrawing from CalPERS and placing its existing pension funds on deposit with another pension administrator, such as what was done in San Francisco,” said the Assured filing.

 

The brief mention of a switch to another retirement system (San Joaquin is one of the 20 counties with an independent retirement system operating under a 1937 act) did not explain how the change would reduce pension costs.

 

Stockton has a “monumental” unfunded liability, said the Assured filing. estimated by CalPERS on a market value basis to total $322.5 million for both plans, safety and miscellaneous.

 

If in the future Stockton is not in bankruptcy and unable to “satisfy” its unfunded liability and needs to withdraw from CalPERS, said Assured, the city “could face a draconian termination liability” ballooning to $946 million and a lien on its property.

 

“Unless the city is willing to tackle its pension liabilities and obligations to CalPERS, there is no legitimate purpose served by permitting it to remain in Chaper 9 (bankruptcy),” Assured argued.

 

The National filing said Stockton is ineligible for bankruptcy for three reasons: a failure to seek concessions from CalPERS, a “self-interested” decision by staff and council members who are CalPERS members, and a lack of “good faith” negotiations.

 

A broader Assured filing goes beyond the CalPERS issue and argues that the city budgeted itself into insolvency, continues to overspend, has not tried to maximize revenue, has no grasp of its finances and cannot produce accurate and timely reports.

 

Assured supports its argument with four reports from experts. City officials are said to have acknowledged that city wages and benefits have been excessive, inflated in some cases by an estimated 25 percent.

 

The Assured filing rebuts a city contention that lower pensions would result in a “mass exodus” of police officers, noting among other things that 1,300 persons took a police agility test last month.

 

A statewide pension reform signed by Gov. Brown in September gives all new hires the same low pension, Assured said, further weakening the city contention that high pensions must be maintained to remain competitive in the marketplace.

Ed’s Note: Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/


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