Pensioners Take Note, Municipal Bond Storm Coming

[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.

 

Illinois’ Pensions are the Worst

A new report being issued today — see the bottom of this post — from the Pew Center on the States says that Illinois once again ranks 50th of the 50 states in assets relative to liabilities.

But while Illinois’ absolute position did not sink — a mathematical impossibility — its relative position did erode, as the shortfall in terms of dollars here worsened faster than it did on average in other, better-positioned states.  …

Illinois “is on an unsustainable course,” said David Draine, the chief author of the report by the Washington, D.C.-based public policy and research group.  …

According to the report, Illinois as of the end of fiscal 2010, the latest year for which national figures are available, ranked dead last of the 50 states, having on hand only 45 percent of the assets needed to pay $139 billion in accrued pension liabilities.

The report concerns the state’s five retirement funds, covering state workers, teachers who work outside of Chicago, professors in the University of Illinois system, judges and members of the General Assembly.

The total unfunded liability as of the end of fiscal 2010 — that was June 30, 2010 — was $75.73 billion, somewhat less than the current $83 billion figure cited earlier this year by the Legislature’s economic watchdog unit.

via Crain’s Chicago Business.

Public sector unions need to understand the reality.  Retirees are in serious danger of not getting paid what they are owed.  Default is becoming a more and more real possibility.

Heck!  These numbers don’t even include the Chicago Teacher’s Union.  So the situation is even worse.