One of the biggest questions to be answered by the bankruptcies of two large California cities, Stockton and San Bernardino, is "How hard will CalPERS fight?" CalPERS is the gigantic pension fund for California's public workers, managing more than $230 billion. And it's now being accused by a Bermuda-based bond issuer of getting favorable treatment in Stockton's Chapter 9 proceeding.
A Stockton proposal to creditors in May, which was made before Chapter 9 proceedings began, showed the city on the far outskirts of the San Francisco Bay Area was ready to fully pay pension fund payments but largely abandon payments on $121 million of pension obligation bonds backed by Assured Guaranty.
Assured calculated that the loss on bond principal would be 83 percent. That amounts to $100 million, which Assured would have to cover.
Stockton has already popped on the radar of a major ratings agency, Moody's, for a bankruptcy plan that indicates it won't be paying its debts, an unusual occurrence for municipalities. This is from a post I wrote a few weeks back:
Stockton stopped paying some of its debt prior to entering a state-mandated 60-day mediation period before declaring bankruptcy. And the bankruptcy budget it created last month contains no provision for debt service, so Moody's anticipates a default by September 1.
Assured Guaranty shouldn't be surprised that Stockton is putting everyone else behind CapPERS. When it comes to pension obligations, CalPERS considers what it's owed to protected by an unbreachable legal wall. This is from the New York Times, from earlier this year, prior to Stockton's Chapter 9 declaration:
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.
Prior to our recent spate of bankruptcies in California — Mammoth Lakes has also entered Chapter 9 — the most recent major test of CalPERS' claims occurred with Vallejo, which spent over three years in bankruptcy. CalPERS didn't just threaten to throw battalions of lawyers at the city — it actually wound up raising what Vallejo had to contribute to pensions, according to Calpensions.com.
The irony here is that Assured Guaranty is an issuer of pension obligation bonds — bonds that raise money so that cities like Stockton can keep up their payments to the likes of...CalPERS! The giant pension fund already had Stockton going into debt to pay pensions. Now it's going to make sure that paying that debt doesn't take precedence in bankruptcy court over what Stockton will have to continuing paying when its Chapter 9 is over.