The War Between Calpers and The Bondholders

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The focus of our next meeting (May 8th) will be the “Looming Federal Bailouts of Illinois and Detroit, Etc., Etc., Etc.” caused primarily by under-funding of state and local pension plans that the non-partisan Congressional Budget Office estimated in 2011 probably amounts to $4 TRillion.

Recent events include the spectacle of the bankruptcy filing of Stockton CA being supported by Calpers (the California state-employee pension fund) but opposed by bondholders because Stockton proposes to short-change bondholders disproportionately in order to protect Calpers.

While the bankruptcy filing of San Bernardino CA is opposed by Calpers and supported by bondholders because San Bernardino proposes to treat all creditors equally.

And Detroit MI was even denied the privilege of filing for bankruptcy by the Governor of Michigan who announced a state takeover two months ago (local governments are chartered by each state which can modify or revoke the charter at any time). Yesterday (4/12/2013) the Mayor of Detroit who no longer has any power, proposed a budget with a $380 million deficit, and the Dictator of Detroit appointed by the Governor, issued a press release rebuking the Mayor and reminding him that he has no authority.

We will also study why municipalities get a “free pass” under the Bankruptcy Law. After all, if homeowners in a geographical area formed a partnership to provide themselves with police and fire protection, schools for their children, etc., all of the homeowners would be personally liable for the debts of the partnership, including unfunded pension liabilities.

If the homeowners had used a real partnership instead of calling their partnership a “municipal government,” creditors such as their employees suing for their pensions, would be able to obtain in Federal Bankruptcy Court such remedies as attaching the salaries of all the residents, and liquidating their assets (INCLUDING THE FORECLOSURE OF THEIR HOMES subject to any so-called Homestead Exemptions) to pay the pensions.

This could, of course, turn the geographical area into a proverbial Ghost Town. Which Detroit and many other urban centers, already are.

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Even if the pols wanted the federal government to bail out all the profligate state and local governments, would the federal government have the financial capacity for doing so???

And what if, for example, the federal government could only bail out the pensions for the employees of the profligate (primarily Blue) states and their local governments, by eliminating Social Security for the general population???

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There do not appear to be any books on this topic, so this is another occasion for which we will have to do our own homework.

The initial reference materials posted in this section include --

(1) The 2011 analysis of the non-partisan Congressional Budget Office explaining why the under-funding of state and local pension plans is calculated to approximate $4 TRillion.

(2) The Wikipedia overview on municipal bankruptcies.

(3) The statutory text of Chapter 9 of the Federal Bankruptcy Law which governs municipal bankruptcies.

(4) The 1/28/2013 Reuters article about Detroit’s looming bankruptcy.

(5) The 4/12/2013 Reuters article describing the War of the Budget between Detroit’s Mayor and Detroit’s State-Appointed Dictator.

(6) The 4/3/2013 Reuters article describing the War Between Calpers and The Bondholders of Stockton CA and San Bernardino CA.
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johnkarls
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Joined: Fri Jun 29, 2007 8:43 pm

The War Between Calpers and The Bondholders

Post by johnkarls »

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War Between Calpers and The Bondholders of Stockton CA and San Bernardino CA

Reuters – Wednesday 4/3/2013 – 1:27 am EDT

Stockton and San Bernardino, A Tale of Two Bankruptcies

Stockton and San Bernardino, the two California cities that have filed for bankruptcy protection, are both considered test cases in the epic battle over whether municipal bondholders or pensioners will absorb most of the pain when a government goes broke.

A federal court ruling on Monday that allowed Stockton’s bankruptcy case to move forward underscored the huge differences between the two cases and how they are likely to unfold.

Stockton, the largest U.S. city to seek bankruptcy protection, engaged in years of cost-cutting and attempted to negotiate with its creditors before declaring insolvency -- actions that were lauded by U.S. Bankruptcy Judge Christopher Klein on Monday when he ruled the city eligible for bankruptcy protection.

Stockton has kept current on its payments to Calpers, the state pension fund, even as it has defaulted on some bond payments and declared its intention to wring concessions from the Wall Street creditors. Thus Calpers has supported Stockton’s bankruptcy filing, while the so-called capital-market creditors have opposed it.

Stockton has also produced a plan for operating in bankruptcy that runs to nearly 800 pages. City Manager Bob Deis, by all accounts, has run the process with an iron fist, and the bankruptcy proceedings are likely to be orderly even as the central conflict between creditors and pensioners is fought bitterly.

In San Bernardino, none of this has happened. The city did not engage in substantial staff nor budget cuts in the years prior to the bankruptcy, nor did ti seek to negotiate with any creditors. Instead, the city declared a fiscal emergency, a move aimed at avoiding negotiations, and simply stopped paying both bondholders and Calpers.

Its pre-bankruptcy plan rant to just 12 pages. Its interim city manager, overwhelmed by the process and the city’s corrosive politics, quit earlier this year, as did the finance chief. Affairs in the city are so chaotic that on Monday night the council voted to contract out its finance department.

In court, San Bernardino’s Wall Street creditors -- some of them the same in Stockton’s case -- have supported its quest for bankruptcy eligibility, because the city is treating them and Calpers equally. And in another mirror image to Stockton, Calpers is opposing San Bernardino’s request for bankruptcy protection.

“Because San Bernardino did not negotiate with creditors at all before declaring bankruptcy, it has a far heavier burden to prove eligibility for bankruptcy,” said Karol Denniston, a bankruptcy attorney with Schiff Hardin in San Francisco and the author of part of California’s bankruptcy code.

Under both state and federal bankruptcy law, cities must prove that they attempted good faith negotiations with creditors before filing for bankruptcy -- or that a sudden fiscal emergency of such scale made negotiations impossible.

Because San Bernardino took the fiscal emergency route, “the city has to show that negotiations were impossible and would not have accomplished anything, and that is much more difficult,” Denniston said.

James Spiotto, a municipal bankruptcy specialist and a partner at Chapman & Cutler in Chicago, said because San Bernardino declared a fiscal emergency, it must now prove that the health, safety and well-being of its residents was in jeopardy if it had not taken such a drastic step.

That’s a separate, distinct burden of proof, and it’s a difficult and higher one than in Stockton’s case,” Spiotto said.

But, Spiotto added, the chaos suffusing San Bernardino’s affairs “may be the weight of evidence they need to prove they had to declare a financial emergency.”

In Monday’s Stockton ruling, U.S. Bankruptcy Court Judge Christopher Klein suggested that the issue of how pension payments are treated relative to bond payments will be a central one in the case going forward -- and the issue will likely be resolved by Klein himself.

[RL Editorial Note = Absolutely NOT “likely” since this issue, whichever way Judge Klein decides, will be appealed and may not reach the U.S. Supreme Court until at least two U.S. Circuit Courts of Appeal have disagreed with respect to it.]

In San Bernardino, if the city fails to achieve bankruptcy protection, the same fight between Calpers and Wall Street creditors will take place -- but without the orderly supervision of a bankruptcy judge.

Instead, the issue would likely play out in a chaotic flurry of state court cases as city workers, unions, pensioners, bondholders and other creditors press for enforcement of their contractual rights.

Who might come out on top in that is anyone’s guess.

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