Even in Bankruptcy, Unions Get Special Treatment ? Reason ...

Municipal bonds have long been among the safest investments, but
a coming wave of municipal bankruptcies in California?and the
disturbing way one of those cities is stiffing its
bondholders?could change perceptions about such bonds? safety.

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Steven Greenhut

The struggling port city of Stockton has declared bankruptcy
after a spending spree where officials granted workers an absurdly
generous lifetime medical care benefit, dramatically increased
pensions, and floated debt to finance dubious downtown
redevelopment projects.

When the city couldn?t make its pension payments in 2007, it
borrowed $125 million in bonds to cover the mess it created by its
pension increases. Now the city government is as upside-down as
many of its homeowners and officials are blaming the foreclosure
crisis, conveniently neglecting that the current reduction in
property tax revenue has come after years of dramatic increases in
such revenue.

Now Stockton officials want to stiff Assured Guaranty, the
Bermuda-based bond insurance company, for about $103 million. The
company?noting that Stockton is going under in part because it
can?t make its pension payments to the California Public Employee?s
Retirement System?argued in a statement, ?If Stockton is
disappointed with CalPERS? investment performance, it should be
taking that up with CalPERS rather than reneging on the city?s
obligation to holders of the pension bonds.?

Stockton?s city manager Bob Deis accused the company of ?bad
faith? and ?whining? even as he whined that Assured Guaranty
doesn?t care about anarchy in Stockton?s streets, as the city?s
crime rate soars after police cutbacks.

But it?s not the fault of lenders that city officials are so
unconcerned about the safety of their residents that they
continually put the demands of wealthy pensioners above the needs
of local residents. Like many cities in this state, Stockton?s
infrastructure is crumbling as officials serve mainly as benefit
providers to those who work for the city or who are retired from
city government.

Deis?s statement is the equivalent of a wastrel who spent 10
years running up debt on luxurious living, then got mad at his bank
for wanting to get paid back: ?Hey, you don?t care that I can?t
feed my kids!?

Of course, it?s hard to top the arrogance of the scandal-plagued
CalPERS, which has responded to Assured Guaranty?s complaints by
insisting that ?obligations owed to the public workers of the city
have priority? over creditors such as Assured Guaranty. CalPERS
also insists the media is ?hyping? the idea that pension promises
have anything to do with cities going belly up. CalPERS, which in
1999 advocated retroactive pension increases based on assumed rates
of returns that essentially required the Dow Jones to reach 25,000
by 2009, is backed by taxpayers whether its projections are right
or wrong.

As cities run out of money and pension obligations grow, we will
increasingly see officials faced with a choice between protecting
city workers or taxpayers. It?s not hard to understand why the
politically powerful CalPERS is so confident that the demands of
public employees always come first.

As the Stockton Record reported recently, CalPERS ?dwarfs all
other creditors with a $245 million liability in the city over the
next decade. Yet National Public Finance Guarantee Corp., an
insurer of several Stockton bonds, contends in its court papers
that CalPERS is conspicuously missing from the list of those
Stockton engaged in pre-bankruptcy negotiations ? .?

That company argues persuasively that the city never had any
intention to seek reduced payments from CalPERS. In bankruptcy, the
company or city runs out of money and then the creditors fight it
out. Here, it seems like city officials cherry-picked which debtors
to stiff, which certainly backs the company?s case that Stockton
officials have showed bias and that this is a distortion of the
bankruptcy process.

While the bond markets aren?t yet spooked, they do have reason
for concern given that pension debts are growing, and there are few
other places to trim if public employee retirement plans are off
the table. Even the feds are sounding some warning bells. As
Bloomberg reported last month, ?The U.S. Securities and Exchange
Commission said it plans to seek power to force better disclosures
from states and cities participating in the $3.7 trillion
municipal-bond market.? They should add this disclosure: Your
retirement investments will always lose out to public employee
pension demands.

Those of us who have viewed Chapter 9 bankruptcy as a useful
option to help troubled cities get their books in order have
miscalculated. Public employee unions and their allies in the
courts and the retirement systems are so powerful that even during
dire financial circumstances, their selfish demands trump
everything else. Although bankruptcy can be a good tool, as Orange
County?s 1994 bankruptcy made clear, the process is no panacea for
incorrigibly wasteful, union-controlled local governments.

The crisis is not going away, despite CalPERS? insistence
otherwise. Former Los Angeles Mayor Richard Riordan, for instance,
said earlier in the week that the state?s largest city faces
?disaster? if officials there don?t fix LA?s pension system.

We should closely watch the unfolding proceedings in bankruptcy
court, as Stockton goes through this process. But the more
significant battle is in San Jose, as courts determine whether
voters? support for a June pension reform measure that cuts
pensions for existing workers is legal. The key there is the battle
over cutting pensions for current workers, given that cuts to new
hires only will not defuse the pension-debt time bomb.

If the courts side with reformers, there may be hope for rolling
back pension costs and saving city services. If not, Californians
better get ready for higher taxes and fewer municipal services,
given that there are precious few options left. And without a
reform path that touches pensions for existing workers, investors
might want to rethink the long-term safety of their bond holdings,
which will become an even bigger target.

Source: http://bankruptcylawyersacramento.net/even-in-bankruptcy-unions-get-special-treatment-reason/

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