Calpensions: Stockton bankruptcy: the case for CalPERS cuts ...

By Ed Mendel
Monday, April 1, 2013

If a federal judge rules today that Stockton is eligible for bankruptcy, bond insurers facing big losses may wonder if they should have taken a harder look at how the city?s CalPERS debt could be cut.

The insurers, including the backer of a $125 million pension bond, would have to pay bondholders millions under a city proposal to cut general fund bond payments and continue making full payments to its largest creditor, CalPERS.

Assured Guaranty and National Public Finance Guarantee argued during a three-day trial last week that Stockton failed to meet the requirement for ?good faith? negotiations with creditors before filing for bankruptcy last June, temporarily staying debt collection.

The city argued that pensions are needed to remain competitive in the job marketplace and retain police, that labor has been hit by cuts in pay and retiree health car and that not paying CalPERS would trigger termination and a $1 billion payment.

Ironically, said a city attorney, the insurers provided no legal basis under California law for cutting pensions in pre-bankruptcy negotiations, but also oppose eligibility for the bankruptcy that might allow pension cuts.

?What good would dismissal of the Chapter 9 (bankruptcy) case do for them?? said Marc Levinson, an attorney for Stockton.

The financially ?broke? city would still need debt relief, Levinson said, and file for bankruptcy again ? this time without the 90-day mediation with creditors prior to filing bankruptcy under a new state law, using the emergency ?off ramp? instead.

He said the bond insurers used extensive sworn testimony and document requests in a nine-month delay, seeking ?leverage? with the ?perceived threat? of heavy city spending on a ?plan of adjustment? to cut debt after the ?inevitable? ruling of eligibility.

The bond insurers focused on the city failure to seek debt relief from CalPERS or explore alternatives, such as withdrawing city assets from the pension fund without triggering a $1 billion termination penalty.

?The city never tried,? said Matthew Walsh, an attorney for National Public Finance Guarantee. The insurers argued that they were targeted for ?disproportionate? cuts before Stockton began the 90-day mediation.

The city did not ask the California Public Employees Retirement System for a ?hardship? rate reduction until Dec. 4, after the insurers had raised the issue of lowering pension costs by extending the debt payment period.

CalPERS said Stockton did not meet the criteria. In a followup telephone call, an official said the city was told, among other things, that it did not qualify for an exception due to potential inability to ?provide continuation of funding at termination.?

A hardship rate would save an estimated $4.5 million over three years, far short of closing a $26 million general fund budget gap. Stockton considered a hardship request early but decided to wait until after filing for bankruptcy, said Bob Deis, the city manager.

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Source: http://inlandpolitics.com/blog/2013/04/01/calpensions-stockton-bankruptcy-the-case-for-calpers-cuts/

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