Untouchable Pensions May Be Tested in California
New York Times, 2012-03-17

When the city manager of troubled Stockton, Calif., had to tell city council members why it was on track to become the biggest American city yet to go bankrupt, it took hours to get through the list.

There was the free health care for retirees, the unpaid parking tickets, the revenue bonds without enough revenue to pay them. On it went, a grim drumbeat of practically every fiscal malady imaginable, except an obvious one: municipal pensions. Stockton is spending some $30 million a year to pay for them, but it has less than 70 cents set aside for every dollar of benefits its workers expect.

Some public pension experts think they know why pensions were not on the city manager’s list. They see the hidden hand of California’s giant state pension system, known as Calpers, which administers hundreds of billions of dollars in retirement obligations for municipalities across the state.

Calpers does not want cities like Stockton going back on their promises, and it argues that the state Constitution bars any reduction in pensions — and not just for people who have already retired. State law also forbids cuts in the pensions that today’s public workers expect to earn in the future, Calpers says, even in cases of severe fiscal distress. Workers at companies have no comparable protection.

Stockton is in the midst of a mediation process with its creditors that will determine by the end of June whether it will file for Chapter 9 bankruptcy, which would allow the city to negotiate reductions in its debt in court.

For Calpers, the prospect of a California city in Federal Bankruptcy Court portends a potential test of the constitutional mandate that federal law trumps state laws — in particular, the state laws that protect public workers’ pensions in California. Such a challenge could blow a hole in what experts consider the most airtight pension protections anywhere.

“Obviously, what Calpers wants is that it doesn’t come up in the process, which I think is ridiculous,” said David A. Skeel Jr., a law professor at the University of Pennsylvania who writes frequently on bankruptcy. “My view is that even the California Constitution is subsidiary to federal bankruptcy law.”


With No Vote, Taxpayers Stuck With Tab on Bonds
New York Times, 2012-06-26

Surprised local taxpayers from Stockton, Calif., to Scranton, Pa., are finding themselves obligated for parking garages, hockey arenas and other enterprises that can no longer pay their debts.

Officials have signed them up unknowingly to backstop the bonds of independent authorities, the special bodies of government that run projects like toll roads and power plants.

The practice, meant to save governments money, has been gaining popularity without attracting much notice, and is creating problems for a small but growing number of cities.

Data from Thomson Reuters suggests that local taxpayers are backing so-called enterprise debt at five times the rate they did 10 years ago. The resulting municipal bonds are sometimes called “double barreled,” because they are backed by both the future revenue of a project and some sort of taxpayer backstop. The exact wording and mechanics can vary.

With many cities now preoccupied with other crushing costs — pension obligations, retiree health care, accumulated unpaid bills — a sudden call to honor a long-forgotten bond guarantee can be a bolt from the blue, precipitating a crisis. The obligations mostly lurk in the dark. State laws requiring voter pre-approval of bonds don’t generally apply to guarantees. Local governments typically don’t include them in their own financial statements or set aside reserves to honor them.

“These are debts that do not show up clearly, no matter how closely you look at the balance sheets,” said Carmen M. Reinhart, an economist at the Peterson Institute for International Economics who has written extensively about government debt. They “come out of the woodwork in bad times.”


Creditors of Stockton Fight Over Pension Funding While in Bankruptcy
New York Times, 2012-08-24

Creditors of the city of Stockton, Calif., are mounting a challenge against a popular belief: that public workers’ pensions are impervious to cutbacks even when a city goes bankrupt.

They are arguing that Stockton, which has stopped paying interest and principal on its bonds, is not treating its bankruptcy creditors equitably as is required under federal law because it is still funding the pensions of its workers.

Stockton filed a rare Chapter 9 bankruptcy petition in June, citing debts that include about $250 million in municipal bonds and $147 million in unfunded pensions for its workers. The creditors include two bond insurers that must make the payments on Stockton’s bonds if the city fails to do so.

Now it will be up to a judge in United States Bankruptcy Court in Sacramento to help Stockton distribute the pain fairly among its creditors.

“The city never asked for a single dollar in reduction of its liability to Calpers,” said one of the bond insurers, National Public Finance Guarantee Corporation, in a document filed with the court. Calpers is the California Public Employees’ Retirement System, the state’s public pension fund.

The case is being closely watched by officials in other distressed cities in California and elsewhere.

If Stockton’s case shows that public pensions can be reduced in federal bankruptcy court, despite state laws that protect the promised retirement funds, other severely strained communities are likely to try the same thing, said Karol K. Denniston, a bankruptcy lawyer at Schiff Hardin, who attended Stockton’s first hearing on the case Thursday as an observer.

“It’s the first time we’ve seen the clash of these issues,” said Ms. Denniston, who works with other California cities on restructuring their finances.

In the past, Chapter 9 bankruptcies by major cities have been extremely rare, so there is virtually no precedent for how the federal bankruptcy courts will handle municipal pensions. Companies and their workers do not face such uncertainty under Chapter 11.

A federal pension insurer, the Pension Benefit Guaranty Corporation, was created in 1974 to take over failing company pension plans and pay retirees their benefits, up to certain limits. Companies are also free to freeze their pension plans and switch to 401(k) plans without being bankrupt.

But there is no such legal framework, and no pension guarantor, for municipalities.


How Plan to Help City Pay Pensions Backfired
New York Times, 2012-09-04

Jeffrey A. Michael, a finance professor in Stockton, Calif., took a hard look at his city’s bankruptcy this summer and thought he saw a smoking gun: a dubious bond deal that bankers had pushed on Stockton just as the local economy was starting to tank in the spring of 2007, he said.

Stockton sold the bonds, about $125 million worth, to obtain cash to close a shortfall in its pension plans for current and retired city workers. The strategy backfired, which is part of the reason the city is now in Chapter 9 bankruptcy. Stockton is trying to walk away from the so-called pension obligation bonds and to renegotiate other debts.