[B]ut California too is now starting to hand it to bondholders. Cities in California are now testing the limits of bankruptcy law, and not paying the debt nor the payments for retirees to the state system. Thus this article describes how the state retirement system (CALPERS) is suing to demand payment, and saying that retiree obligations come AHEAD of creditors (municipal bond holders) in the queue.
“The issue is, do Calpers obligations supersede unsecured bondholders?” Fabian said in a telephone interview. “There’s an awful lot of unsecured bondholders in California. If you put pension obligations to Calpers as secured and senior to unsecured debt, in effect those bonds have been downgraded.”
In the Stockton and San Bernardino cases, Calpers is arguing that pension contributions must be made ahead of payments to other creditors because they are so-called statutory liens, or debts that state law requires to be paid. Bondholders and other creditors that oppose Calpers argue that pension debt is a contractual obligation like any other.
You’d have to be nuts to buy California municipal debt if Calpers has precedence and employee retirement benefits can’t be cut, since this is the MAIN THING that is driving these cities into insolvency. In the future likely these municipalities would just contract out everything to third parties that wouldn’t pay their employees those giant benefits, but the cities have to jettison these liabilities to put their fiscal house in order today.
via Chicago Boyz.
In case this is a little tough to follow, in bankruptcy debts are paid according to a priority. There’s a decent primer here.
The “Illinois” based pensions are probably ok. e.g. ITRS. There is no statute permitting a state to file for bankruptcy protection.
However cities are corporations; they can (and do) file for bankruptcy protection. CPS, CPD, CFD employees and retirees should watch these cases in California closely. They may be getting a real haircut if they have to defer to the bond holders to get their money.
It’s all very very sad.