Bond holders vs. Calpers – who gets priority when CA cities go BK

[ctr70]

http://www.economist.com/news/united-states/21567954-bankrupt-city-takes-public-pensions-behemoth-breaking-californian-taboo

Good Economist article about how it could go to federal court over who gets priority for payment when CA cities go into BK. Bondholders want Calpers to get treated like any other unsecured creditor.

Bondholders are challenging Stocktons eligibility for BK b/c it makes no effort to tackle the bloated pension pay outs.

A ruling against Calpers claims to seniority in BK may make BK look more attractive to more cities. Ruling in favor of Calpers could lead to credit downgrades for CA city MUNI debt, the could hurt their ability to borrow.

Will be interesting to see how this plays out.

[CA renter]

In bankruptcy, employee compensation is a priority claim. These pension contributions are a part of employee compensation.

It’s doubtful that a court decision in favor of CalPERS would have any affect on the credit ratings since it’s always been understood, at least in California, that pensions take priority over unsecured bondholders. If a government entity is a bad credit risk, then that will affect its credit ratings; but it has always been understood in public policy circles (and, presumably, among serious bond investors) that pension funds have priority. This is a topic that has been discussed for decades, so it shouldn’t take anyone by surprise.

One more thing: the battle is not between “taxpayers” and public employees. The notion that taxpayers are going to cover all losses originates from the privatization movement that has been trying to eliminate unions for a long time (so they can take over public assets and revenues, NOT so that they can save taxpayers money). It is primarily bondholders (and other unsecured creditors), not taxpayers, who will take the hit in the event of a bankruptcy.

Naturally, Wall Street — populated by by those in the privatization movement as well as bondholders and other “investors” — wants to strip unions of their rights and reframe this issue as a “taxpayers vs. union” issue as part of their propaganda, but that’s not what it really is. Joe Sixpack will not benefit one single bit by the decimation of unions. To the contrary, it will negatively affect wages and benefits in all other industries because those employers won’t have to compete with public employers (and their better wages and benefits) for employees, and J6 Taxpayer will not see a dime in savings.

The pension reform bill has already addressed many of the problems with CalPERS. Just to be clear, it is not just “taxpayers” who are having to pay for the additional pension contributions, especially after Jerry Brown’s reforms passed. “Taxpayers,” BTW, includes public employees who often pay at least as much, as a percentage of income, as most of the “rich” who are whining the most, because these public employees are W-2 earners and don’t get to fraudulently deduct all of their “business expenses” or get preferential tax treatment like those who have passive earnings.

[bearishgurl]

Thanks for beating me to the punch, CAR. The above is another one of your great, educational posts. For the most part, the general public does not understand these concepts unless they are explained to them in plain language … just as you did here :-]

[davelj]

[quote=CA renter]In bankruptcy, employee compensation is a priority claim. These pension contributions are a part of employee compensation.
[/quote]

Whether or not pension contributions are “part of employee compensation” is up for debate. Certainly, the *employee* contribution portion of the total contribution is probably sacrosanct. But the status of the *employer* contribution portion is what judges will be deciding.

Recall that when a corporation goes bankrupt and its pensions are taken over the the Pension Benefit Guaranty Corporation that the maximum pension benefit guaranteed by PBGC is ~$56K annually. Benefits above that level are lost – and constitute a haircut to the pension fund – just like the haircut that the bondholders take. So, while it’s not an apples-to-apples comparison, there is precedent in the corporate world for pensions taking a haircut in bankruptcy.

My point is that it remains to be seen what happens to public pensions in bankruptcy. I suspect they will be cut back but that most or all of the cutbacks will occur for those with large pensions, just as in the case of the PBGC.

You make it sound like this issue is settled. I can assure that it’s not. Not by a long shot.

[bearishgurl]

[quote=davelj][quote=CA renter]In bankruptcy, employee compensation is a priority claim. These pension contributions are a part of employee compensation.
[/quote]

Whether or not pension contributions are “part of employee compensation” is up for debate. Certainly, the *employee* contribution portion of the total contribution is probably sacrosanct. But the status of the *employer* contribution portion is what judges will be deciding.

Recall that when a corporation goes bankrupt and its pensions are taken over the the Pension Benefit Guaranty Corporation that the maximum pension benefit guaranteed by PBGC is ~$56K annually. Benefits above that level are lost – and constitute a haircut to the pension fund – just like the haircut that the bondholders take. So, while it’s not an apples-to-apples comparison, there is precedent in the corporate world for pensions taking a haircut in bankruptcy.

My point is that it remains to be seen what happens to public pensions in bankruptcy. I suspect they will be cut back but that most or all of the cutbacks will occur for those with large pensions, just as in the case of the PBGC.

You make it sound like this issue is settled. I can assure that it’s not. Not by a long shot.[/quote]

davelj, I understand that it is the employer-contribution of the pension that the judge for the Stockton BK will be deciding upon. However, the rights to a public pension, the formula for qualifying for that pension and the formula for determining its amount are steeped in state law. A private corporation’s pensions are not. The question of law is whether a federal judge can trump state law. If this BK judge makes a ruling against the City of Stockton pensioners, I have no doubt that it will be summarily appealed … in short order. As a matter of fact, an appeal will be likely ready to file prior to the hearing when the issue is supposed to be decided … just as a precaution.

Perhaps some of the CA inland cities and counties which were grossly overbuilt during the millenium boom and whose RE markets then crashed (ex: Stockton) will now begin to see greater property tax proceeds in the coming months/years. This should ameliorate most of their general fund shortfalls and enable them to pay what they promised into the pension funds. And there is nothing precluding these jurisdictions from shoring up their own house by removing the health-plan allowance from MOST retirees (for those where their HC allowance is NOT protected by law), and, of course, eliminating defined benefit plans for those hired after a certain date and/or future hires.

You are correct in that this issue will not be “settled” until the “fat lady” sings. And that will likely be a few years from now.

[bearishgurl]

[quote=davelj]…My point is that it remains to be seen what happens to public pensions in bankruptcy. I suspect they will be cut back but that most or all of the cutbacks will occur for those with large pensions, just as in the case of the PBGC…[/quote]

davelj, Let’s use the City of SD’s DROP program as an example and also the thousands of “deals” CA jurisdictions made with tenured employees to get them to retire a little early, such as adding additional year(s) of service on at the end of a career in order to “spike” their retirement pay.

These machinations, however long a “past practice,” are NOT protected by law. I agree that former employees who are receiving extraordinarily high pensions which have nothing to do with years of service and their highest 1-3 years of pay are being unjustly enriched and their pensions could be subject to a cut in a municipal or county BK.

[bearishgurl]

As to a possible Federal appeal of this issue by CA unions, I just don’t see these (BK) CA jurisdictions winning on this issue. CA labor laws, including the right of collective bargaining, the mechanisms by which employees earn pensions and the remedies for contract enforcement mirrors its well-established counterpart of the National Labor Relations Act (NLRA) body of Federal law. The labor lawyers will simply compare the origins of the prevaling CA law to the NLRA and argue the applicable parts of the NLRA before the Federal appeals court and win. Slam dunk.

That’s what I predict will happen.

[ctr70]

I’m fine with pensions as long as their is NO tax payer guarantee at all, they are 100% self-sustaining. If the investments tank, the difference should not be made up by tax payers, the recipients should get less. If they don’t get the 8-9% target return, tax payer money should not back these defined benefit pensions up.

[CA renter]

[quote=davelj][quote=CA renter]In bankruptcy, employee compensation is a priority claim. These pension contributions are a part of employee compensation.
[/quote]

Whether or not pension contributions are “part of employee compensation” is up for debate. Certainly, the *employee* contribution portion of the total contribution is probably sacrosanct. But the status of the *employer* contribution portion is what judges will be deciding.

Recall that when a corporation goes bankrupt and its pensions are taken over the the Pension Benefit Guaranty Corporation that the maximum pension benefit guaranteed by PBGC is ~$56K annually. Benefits above that level are lost – and constitute a haircut to the pension fund – just like the haircut that the bondholders take. So, while it’s not an apples-to-apples comparison, there is precedent in the corporate world for pensions taking a haircut in bankruptcy.

My point is that it remains to be seen what happens to public pensions in bankruptcy. I suspect they will be cut back but that most or all of the cutbacks will occur for those with large pensions, just as in the case of the PBGC.

You make it sound like this issue is settled. I can assure that it’s not. Not by a long shot.[/quote]

Big difference: the PBGC is a public *insurance* entity for *private* pension plans, and they have little control over these pension funds (especially before the Pension Protection Act of 2006), whereas the state and local pension funds are NOT insurance funds for pensions; they are the pension funds themselves, and have more control over the types of investments and contribution requirements for covered pensions.

I would also add that the pension contributions ARE a part of an employee’s compensation because the employers/employees take into account the total compensation for their employees during contract negotiations. Other items are increased or decreased based on the different components of employee compensation, including pension contributions.

[CA renter]

[quote=ctr70]I’m fine with pensions as long as their is NO tax payer guarantee at all, they are 100% self-sustaining. If the investments tank, the difference should not be made up by tax payers, the recipients should get less. If they don’t get the 8-9% target return, tax payer money should not back these defined benefit pensions up.[/quote]

Here’s the problem:

You don’t want to pay for any portion of possible pension losses for public employees. That’s cool, but I don’t want my tax money to subsidize the profits of employers who hire low-wage or illegal immigrant workers (who use the majority of public welfare benefits and are very costly for the education system), nor do I want to pay to subsidize the profits of landlords, commercial building owners, owners of large tracts of land, etc. when they are not paying market-rate property taxes as a result of Prop 13. I also don’t want to pay for the enormous profits (and personal incomes) of private contractors who offer their services to the government. On a federal level, I HATE paying for totally unjustifiable wars that kill tens of thousands of innocent people, and I HATE paying for the spy infrastructure that is used to spy on American citizens in our own land. I also hate paying for “diplomatic missions” in foreign countries where we overturn popular and/or democratically-elected leaders.

I also HATE paying for the exorbitant incomes of C-suite executives and certain shareholders and investors, etc. not to mention celebrities, whenever I have to buy goods and services (and don’t kid yourself: all too often, we do NOT have a choice).

This is just my short list, BTW.

[edited to add]… My biggest pet peeve: the Wall Street bailouts where the bonuses were quickly flowing back to pre-recession levels and higher! You also have to add what savers are losing as a result of these artificially low interest rates that are forced on us by the Fed so that certain “preferred” entities can maintain their wealth via artificially inflated asset prices. Then, there are the home buyer tax credits, and govt-guaranteed loans, the public-private investment deals (where taxpayers take the losses and private, well-connected individuals get all the profits), loss sharing agreements, govt-backed loans for speculators (like having GSE and FHA loans for speculators and those who are not owner-occupiers), etc. I could go on and on…

Yep, we all have to pay for things that we don’t like in a civilized, democratic society. ALL of us. And I truly believe that police officers, firefighters, nurses, teachers, etc. are nowhere near the top of the list (if on the list at all) of things that taxpayers have to pay for in our current system, but shouldn’t be paying for.

So…what’s the answer? Should we only be able to allocate our money directly to the causes we’re willing to pay for? Not saying that’s necessarily a bad thing, but one has to wonder how that would work in the real world.

[sdduuuude]

[quote=CA renter]Should we only be able to allocate our money directly to the causes we’re willing to pay for?[/quote]

Yes.

[quote=CA renter]Not saying that’s necessarily a bad thing, but one has to wonder how that would work in the real world.[/quote]

How about a tax form that looks like this:

Govt Entity A: ____%
Govt Entity B: ____%
Govt Entity C: ____%
Govt Entity D: ____%
Govt Entity E: ____%
Govt Entity F: ____%
Govt Entity G: ____%

TOTAL: 100%

I betcha schools, military, police would have all the money they need and a whole bunch of stuff the government does now would, appropriately, go unfunded. We would realize exactly what the people want from their government.

[bearishgurl]

[quote=CA renter] . . . I would also add that the pension contributions ARE a part of an employee’s compensation because the employers/employees take into account the total compensation for their employees during contract negotiations. Other items are increased or decreased based on the different components of employee compensation, including pension contributions.[/quote]

Absolutely true. At a “bargaining table” for a public sector contract, it is not uncommon for the employer to “take away” a benefit for another and the union to agree to it.

For instance:

-new “Cafeteria Plan” (giving employees more choice) in exchange for lowering the employer healthcare contribution;

-“enhanced” retirement benefits (changes in pension formula) in exchange for changing sick and annual leave to “personal leave” and dropping the rate of employee leave accruals;

-2 to 3 more step-increases for “maxed out” employees in crowded career clusters in exchange for reduction or elimination of shift differentials in same career cluster;

-and the addition of vision care and health club/alternative medicine discounts in exchange for charging smokers and obese employees a little higher employee contribution of benefits.

I’m not saying all of this is done but only that the parties can make any agreement in there (which follows the law) that each side agrees to.

Both sides privately “caucus” throughout the sessions to determine the value of the “whole nut” (all the agreed-upon proposals and those still on the table thus far) that they will be paying out or giving up, as the case may be.

[SK in CV]

[quote=bearishgurl][quote=CA renter] . . . I would also add that the pension contributions ARE a part of an employee’s compensation because the employers/employees take into account the total compensation for their employees during contract negotiations. Other items are increased or decreased based on the different components of employee compensation, including pension contributions.[/quote]

Absolutely true. At a “bargaining table” for a public sector contract, it is not uncommon for the employer to “take away” a benefit for another and the union to agree to it.

For instance:

-new “Cafeteria Plan” (giving employees more choice) in exchange for lowering the employer healthcare contribution;

-“enhanced” retirement benefits (changes in pension formula) in exchange for changing sick and annual leave to “personal leave” and dropping the rate of employee leave accruals;

-2 to 3 more step-increases for “maxed out” employees in crowded career clusters in exchange for reduction or elimination of shift differentials in same career cluster;

-and the addition of vision care and health club/alternative medicine discounts in exchange for charging smokers and obese employees a little higher employee contribution of benefits.

I’m not saying all of this is done but only that the parties can make any agreement in there (which follows the law) that each side agrees to.

Both sides privately “caucus” throughout the sessions to determine the value of the “whole nut” (all the agreed-upon proposals and those still on the table thus far) that they will be paying out or giving up, as the case may be.[/quote]

Yeah but….

I’m not sure any of those bene’s are treated as priority claims in bankruptcy. Hourly and regular wages are priority claims. I think overtime is. I’m pretty sure vacation and sick time are not. Non-wage benefits for public employees? That’s what the bankruptcy court will decide.

[bearishgurl]

[quote=SK in CV]…I’m not sure any of those bene’s are treated as priority claims in bankruptcy. Hourly and regular wages are priority claims. I think overtime is. I’m pretty sure vacation and sick time are not. Non-wage benefits for public employees? That’s what the bankruptcy court will decide.[/quote]

Good point, SK. I DO believe annual leave is a “wage” because it has to be paid out upon termination. And some government charters have a provision for sick leave to be added to the length of service for retirement purposes but this is NOT codified in state law.

It will be very interesting to see how the BK court rules in the Stockton case, even though the ruling will very likely be appealed if not in favor of the retirement board/unions.

I see this as a time and money-wasting uphill battle for a city who should probably concentrate on getting (and keeping) their house in order regardless of how the court rules. If that means layoffs and RIFs, its citizens will have to get used to less services. If they can’t staff enough employees for their state and Federally mandated programs, then they will have to seek funds from the state/Federal govm’t to run these programs or send those patrons elsewhere to apply for benefits.

Of course, we all know BK would not have been necessary had Stockton (and all other similarly-situated CA cities/counties) not allowed their jurisdiction to become grossly overbuilt during the “millenium boom,” resulting in the need to hire massive amounts of employees for nearly every one of its agencies to serve their exploding populations. Many of their “newcomers” have now exited the region, leaving hundreds of still-vacant homes, condos and apartments in their wake, resulting in the decimating the value of their RE (beyond the value it was when Big Development first came in) and thus a much lower amount of property taxes coming in (after assessment appeals and Prop 8 downward adjustments).

These City Councils and Boards of Supervisors made their own beds by pandering to Big Development and unfortunately must now sleep in them.

[bearishgurl]

[quote=sdduuuude]…I betcha schools, military, police would have all the money they need and a whole bunch of stuff the government does now would, appropriately, go unfunded. We would realize exactly what the people want from their government.[/quote]

This would all be fine if some of these programs weren’t “Federally mandated.” Unfortunately, CA jurisdictions have historically never received near enough from the Federal govm’t to run their “mandated” programs (personnel costs, mainly) as most of the money they DO recieve is passed thru to the eligible beneficiaries in the form of benefits. There are far more “needy” individuals and families here in CA than the Federal govm’t cares to acknowledge.

This problem is particularly pronounced in historically lower-income agricultural cities such as Stockton.

[Author]

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