Tag: Stockton

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.

 

Bankrupt Stockton Chicago

Yesterday’s news:

Officials in Stockton said Tuesday that mediation with creditors has failed, meaning the Central California city is set to become the largest American city ever to declare bankruptcy.  …

The river port city of 290,000 in Central California has seen its property taxes and other revenues decline, while expensive investments and generous retiree benefits drained city coffers.

via NY Daily News.

Tell me something I don’t know, right?

Stockton, with 300,000 residents and $700 million in debt, would be one of the largest cities ever to file for Chapter 9 protection, according to municipal finance experts and bankruptcy officials.

via WSJ.com.

Humm…. ok.  Let’s compare that to Chicago.

Calling local government debt “staggering,” Cook County Treasurer Maria Pappas announced Tuesday that the $108 billion debt tab across various governing bodies in the county translates to $63,525 per Chicago household and nearly $33,000 per suburban household.

via Chicago Sun-Times. (Sept 29, 2011 — we now know the number to be higher.)

Math (not new math, the old fashioned kinda math.)

Stockton:
$700M / 290,000 residents = $2,413.80 of debt for every man woman and child in Stockton.

Chicago:
$63,525 * 1,033,022 households = $65,622,722,550 in total debt;
$65,622,722,550 / 2,695,598 people in the city = $24,344.40 of debt for every man woman and child in Chicago.

In order for the situation to be comparable, the dazzling urbanites of Chicago would have to earn 10 x as much as the poor downtrodden folks of Stockton.

Back to the Census:

Chicago Per Capita Money Income in Past 12 Months — $27,148

Stockton Per Capita Money Income in Past 12 Months — $20,176

So the average joker in Stockton has to work for about a month and a half (2413 / 20176 *365 = 44 days) to pay off their portion of the debt.

The average joker in Chicago has to work for nearly a year (24344 / 27148 * 365 = 327 days) to pay off their portion of the debt.

And so I ask you which one of these municipalities should really be filing for bankruptcy?  Which is in worse financial shape?  Who’s employee’s should be more worried about their pensions?  Who’s politicians are doing the right thing by dealing with the issue square-on and not trying to pawn it off on future generations?

I’m just asking.

Hat Tip to Anthony Curran for the concept of this post.