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Judge Approves Stockton, CA Bankruptcy
A federal judge gave permission for the city
of Stockton, CA to begin bankruptcy proceedings, over the
objections of bondholders in the city's pension system.
The bondholders believe that Stockton did not negotiate in good faith, preferring
the bankruptcy route to the more painful and politically unpopular route of
altering the pension system.
In a case being studied by other cash-strapped
American cities including Detroit, U.S. Bankruptcy Court Judge Christopher
Klein's decision was a setback for bondholders and insurers who had resisted
the California city's bankruptcy filing. Stockton is the largest U.S. city ever to file for bankruptcy.
The judge also signaled that the California
Public Employees Retirement System's position in the case was not above review.
Stockton, a city of 300,000, has so far not reduced
pension payments to retired city workers, although it has eliminated retiree
healthcare benefits.
"This does not mean there is not
potentially a serious issue involving Calpers," Judge Klein said.
"But at this point I do not know what that is." He added that there
were "very complex and difficult questions of law that I can see out there
on the horizon," relating to Calpers.
The decision on Stockton marks the start of a lengthy restructuring of
the obligations that currently overwhelm its finances, which were crippled by
the housing crisis and recession.
Investors in the $3.7 trillion municipal bond
market are concerned that if Stockton is able to avoid paying bondholders in full
without cutting pension payments, other cities will pursue a similar strategy
as they struggle to cope with budget shortfalls.
Kenneth Naehu, head of fixed income at Bel Air
Investment Advisors in Los Angeles, agreed that the case could cloud the issue of where bondholders
stand in relation to retirees and pension funds in a municipal bankruptcy.
In a lengthy preamble to his ruling, Klein
delivered a stinging rebuke to the so-called capital market creditors - mainly
the insurers for bondholders who own hundreds of millions of dollars of Stockton debt - who had opposed the bankruptcy filing.
He rejected the arguments of bondholders and
insurers that Stockton was not truly insolvent when it sought Chapter 9 bankruptcy
protection last summer and that it had improperly failed to seek relief from
its pension obligations.
Klein said capital market creditors had failed
to negotiate in good faith in a pre-bankruptcy mediation, as required by law,
and also criticized their refusal to pay part of the bill for mediation.
Bondholders and insurers in this, and other
municipal bankruptcies to come, will almost certain have to endure a
substantial haircut - just as their sovereign debt holder counterparts in Europe. By the time this all shakes out, borrowing
money will get a lot harder, and a lot more expensive for cities and states.
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3 Comments:
We found out where bond holders stand when the government took over GM (Government Motors). The bond holders got screwed.
Bondholders also get screwed in bankruptcy. That's what bankruptcy does. It discharges debts. I suppose we could satisfy the conservatives among us by returning to debtors prisons as an alternative, but how would we imprison the whole city of Stockton?
Let the good people of California who gave away the store sacrifice to get it back.
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