By Ed Mendel
Thursday, January 17, 2013

Bond insurers who want CalPERS to share the financial pain of the Stockton bankruptcy do not answer a key question in lengthy court filings: How would “bloated” and “overly rich” pensions be cut?

The insurers backing $250 million worth of Stockton general fund bonds argue that the city’s bankruptcy plan gives them major cuts but spares the largest creditor, CalPERS, whose annual bill to the city is expected to nearly double in the next 10 years.

During a 90-day mediation with creditors required under a new state law before filing for bankruptcy, Stockton did not negotiate with CalPERS, say Assured Guaranty and National Public Finance Guarantee.

Instead, National said in a filing last month, Stockton chose “to protect the unsustainable CalPERS pensions that it awarded, but that the city itself cannot now afford, while forcing its other creditors (including National) to foot the bill.”

How negotiating with the California Public Employees Retirement System before filing for bankruptcy would be expected to significantly cut Stockton’s soaring pension costs is not clear.

CalPERS has served notice, notably in Vallejo and San Bernardino, that it will dip into its deep pocket for an all-out legal battle to prevent bankruptcy from being used to cut pensions.

Stockton does not want to cut pensions, arguing that its proposal to eliminate retiree health care is how debt reduction in bankruptcy is shared by employees, who are the actual creditors while CalPERS is just the middleman.

The federal bankruptcy judge handling the case, Christopher Klein, told a UC Berkeley conference the court cannot impose a plan to adjust debt, but does rule on eligibility for bankruptcy and whether the plan to adjust debt is fair to creditors.

The judge appointed a mediator in August, U.S. Bankruptcy Judge Elizabeth Perris, to meet with creditors in an attempt to reach a “consensual plan of adjustment.” An eligibility hearing, originally scheduled Jan. 8, was pushed back to Feb. 26.

Filing for bankruptcy in June gave Stockton an automatic stay on debt collection. Now in the view of some, the creditors will lose much of their leverage if Stockton is found to have met the eligibility standards required for bankruptcy.

The carefully structured Stockton bankruptcy plan appeared to be following the Vallejo model, where the main cuts in bankruptcy were to retiree health care and bond debt.

In addition to facing heavy losses if they have to pay bondholders, the insurers may fear a trend that could affect their industry and the bond market. Stockton has responded to the bond insurer decision to contest the city’s eligibility for bankruptcy.

The insurers say it was not until they contested eligibility that the city met with a consultant to develop a “business case” for not impairing CalPERS and inquired about cutting an unusually generous 5 percent cost-of-living adjustment for pensions.

And it was not until Dec. 4, say the insurers, that Stockton asked CalPERS for a “hardship” rate reduction, which could save the city $1.25 million this fiscal year and a total of $4.5 million over three years.

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