Bloomberg Businessweek
Calpers Bankruptcy Strategy Pits Retirees Against All Others
By Steven Church and James Nash on
December 12, 2012
http://www.businessweek.com/news/2012-12-12/calpers-bankruptcy-strategy-pits-retirees-vs-dot-all-others
The California Public EmployeesfRetirement System is trying to rewrite the
rules for bankrupt cities, claiming that it should get paid before almost
everyone else, including bondholders.
The biggest U.S. public pension fund would set a legal precedent should
courts adopt Calpersfs position that, as an arm of the state, it is exempt from
rules that apply to other creditors in the Chapter 9 bankruptcy cases of San
Bernardino and Stockton. A Calpers victory would threaten public services in a
city trying to reorganize in bankruptcy, or in an extreme case, cause a city to
disincorporate, attorney James E. Spiotto said in an interview.
gChapter 9 was never intended to cause the liquidation of a municipality or
the reduction of services,h said Spiotto, who isnft involved in the San
Bernardino and Stockton cases. gWhat Calpers is doing is threatening the basic
tenet of Chapter 9.h
Pension costs for retired public employees are straining local governments
from California to Rhode Island. In Southern California, San Bernardino says it
is so strapped for cash it must put off $13 million in payments to Calpers or
risk public safety. About 400 miles (644 kilometers) north, creditors of
Stockton are fighting Calpers in court as well, arguing that the pension fund
shouldnft be given preferential treatment and urging the city to take an
aggressive stance in negotiations.
San Bernardino will battle Calpers in a federal court in Riverside,
California, on Dec. 21 over two related legal issues: whether Calpers can sue
the city to force it to make about $7 million in missed payments and whether the
city should be kicked out of bankruptcy.
eShort-Sightedf
Calpers blames elected officials for San Bernardinofs financial problems,
saying in an e-mail that they madegirresponsible and short-sightedh decisions.
Cutting back on what the city owes employees would make it hard to recruit
qualified workers, Calpers spokesman Robert Glazier said.
gThe city will be worse off if they choose not to fulfill their obligations,h
Glazier, deputy executive director for external affairs, said an e-mailed
response to questions. gWe have a responsibility as fiduciaries to protect our
members and the soundness of the retirement system just as our members were
responsible in making their contributions, going to work and doing their jobs.h
In the private sector, when bankrupt corporations fall behind on such
payments, the shortfall is considered an unsecured debt owed to the pension
fund. Only part of the debt is given priority by bankruptcy courts, Spiotto
said.
Administrative Claim
Calpers is arguing that all of its debt should be treated as an
administrative claim, which means only a handful of creditors would be paid
first, such as the lawyers and financial advisers working on the bankruptcy
case, Spiotto said.
gWhat Calpers is trying to do is rewrite the priorities of the bankruptcy
code,h Kenneth N. Klee, who helped revise Chapter 9 of the U.S. Bankruptcy Code
in the 1970s as a lawyer working for Congress, said in an interview. He isnft
involved in the California cases.
Stockton filed for bankruptcy at the end of June. San Bernardino followed on
Aug. 1. Both blamed the slowdown in the economy, which pushed down tax revenue,
and rising costs for pensions, retiree health care and wages, especially for
police officers and firefighters.
In the San Bernardino case, Calpers asked a judge to waive a restriction
preventing the fund from suing the city in state court, where it would have the
chance to force payment.
gThe cityfs failure to make these contributions is a violation of state law,h
Calpers said in court papers.
Seizing Assets
While a city is in Chapter 9, creditors are barred from seizing assets or
suing. One exception is for government agencies that are enforcing a law using
their police or regulatory powers.
gSimply put, if the city is forced to pay Calpers, the cityfs ability to
continue to function would be seriously threatened,h San Bernardino officials
said in court papers.
In Stockton, Calpers General Council Peter Mixon issued a statement arguing
that pensions and other public employee benefits are protected by the California
Constitution and have priority over other creditors.
Stockton has an unfunded pension liability of $147.5 million owed to Calpers,
according to the cityfs bankruptcy petition. The city also owes $124.3 million
on pension obligation bonds and about $142 million for various public projects.
Unfunded Pension
San Bernardino, about 60 miles east of Los Angeles, has an unfunded pension
liability of about $143 million and is in default on $50.4 million in bonds
issued in 2005 to help cover pension obligations, according to court documents
and the city budget.
Central Falls, Rhode Island, exited bankruptcy earlier this year after
cutting pensions and health-care benefits for retirees. The state sided with
bondholders in that case, passing a law that allowed them to put a lien on city
tax revenue. The cityfs bondholders were paid in full, according to court
documents.
Municipal bond investors are watching San Bernardinofs fight with Calpers,
partly because so much of the cityfs debt is tied to pensions, said Richard P.
Larkin, director of credit analysis for Herbert J. Sims & Co., a
municipal-bond underwriter in Iselin, New Jersey.
gIf Calpers wins, I think people are going to look at bankruptcies for
municipalities much more negatively,h Larkin said by telephone. gThis is a
precedent-setting case, not just in California but nationally.h
Immediate Effect
The California bankruptcies probably wonft have an immediate effect on the
municipal-bond market, where prices are rising and yields are shrinking, Larkin
said. Investors are more focused on the debates in Washington over the fiscal
cliff and whether municipal bonds will remain tax-exempt, he said.
Should Calpers win, investors who buy municipal bonds will eventually demand
higher interest rates from cities and counties to compensate for the increased
risk, Richard A. Ciccarone of McDonnell Investment Management LLC said in an
interview.
gIt would put more bondholders at risk than would normally be at risk,h said
Ciccarone, chief research officer at Oak Brook, Illinois-based McDonnell, which
oversees about $8 billion in municipal debt.
Employee pensions should be paid ahead of sophisticated investors who
understood the risks of buying municipal bonds, Calipersf Glazier said in the
e-mail.
gCalpers will champion our members who have relied on the retirement promises
made by the City of San Bernardino,h he said.
The case is In re San Bernardino, 12-28006, U.S. Bankruptcy Court, Central
District of California (Riverside).
To contact the reporters on this story: Steven Church in Wilmington, Delaware
at schurch3@bloomberg.net; James Nash in Los Angeles at jnash24@bloomberg.net
To contact the editor responsible for this story: John Pickering at
jpickering@bloomberg.net