As I said in comments yesterday, watch this space as to why Calpers should care about buying high and selling low. Because the money can actually run out.
A federal judge has approved Stockton, California's application for Chapter 9 Bankruptcy.
A judge accepted the California city of Stockton's bankruptcy application on Monday, making it the most populous city in the nation to enter bankruptcy.
U.S. Bankruptcy Judge Christopher Klein said the bankruptcy declaration was needed to allow the city to continue to provide basic services.
"It's apparent to me the city would not be able to perform its obligations to its citizens on fundamental public safety as well as other basic government services without the ability to have the muscle of the contract-impairing power of federal bankruptcy law," Klein said.
The city of nearly 300,000 people has become emblematic of government excess and the financial calamity that resulted when the nation's housing bubble burst.
Its salaries, benefits and borrowing were based on anticipated long-term developer fees and increasing property tax revenue. But those were lost in a flurry of foreclosures beginning in the mid-2000s and a 70 percent decline in the city's tax base.
Yeah, that will leave a mark.
Now, it is not entirely clear to me the status of Calpers, the major California public pension fund in this bankruptcy. First, there are ongoing payments to Calpers, which is part of payroll costs. This is not a liability per se, but an operating cost. Stockton has already slashed lots of employees and services, thus payments to Calpers were also slashed.
Stockton evidently did take a few payment "holidays", and Calpers is an actual creditor and not just an operating cost:
Stockton's biggest creditors insured $165 million in bonds the city issued in 2007 to keep up with CalPERS payments as property taxes plummeted during the recession. Stockton now owes CalPERS about $900 million to cover pension promises — by far the city's largest financial obligation.
$900 million… hmmm, $900 million. I heard a number like that recently.
Stockton is not really wanting to cut this pension debt, by the way:
A Stockton attorney had said CalPERS is technically not a creditor, but only a trustee of funds held for retirees. He said there is no big pool of city funds CalPERS could dip into to “backfill” a cut in Stockton’s pension debt.
U.S. Bankruptcy Judge Christopher Klein asked if that meant every $1 taken from CalPERS would be a $1 taken from actual pensions. “Exactly right,” said Norman Hile, the Stockton attorney.
The bond insurer attorney, Walsh, disagreed. He said CalPERS debt is based on actuarial projections “years and years” into the future, and with a small change “millions of dollars can be freed up.”
Those actuarial projections, of course, assume that promised payments to retirees actually get paid. That doesn't always happen.
Here is something recent from Calpers:
The CalPERS board last week tentatively approved an employer rate hike of roughly 50 percent over the next half dozen years, replacing a policy that kept rates low during the recession with a plan to reach full funding in 30 years.
While giving unanimous “first reading” approval to the proposal by Chief Actuary Alan Milligan, the board asked for more information before final approval scheduled next month.
“Any addition to the schools (rate) is likely to result in layoffs to employees,” said the board president, Rob Feckner, who represents the largest group of CalPERS members, non-teaching employees in 1,488 school districts.
The CalPERS investment fund, expected to provide about two-thirds of future pension payments, peaked at $260 billion in the fall of 2007, dropped to $160 billion in March 2009 and was back up to $256 billion last week.
The total CalPERS fund had 101 percent of the projected assets needed to cover future pensions in 2007. The funding level dropped to 60.8 percent in 2009 and in the last valuation (as of June 30, 2011) was back up to 73.6 percent.
Under the current rate policy, the funding level in 30 years is projected to reach 79 percent for most state workers, 86 percent for most local governments and 82 percent for non-teaching school employees.
A funding level of 80 percent is adequate, some experts think. But CalPERS officials, shaken by the huge investment loss five years ago, worry that another deep recession could drop funding low enough to make reaching full funding impractical.
For the record, the "80 percent is adequate" line is bullshit.
Previous bankrupt entitities in California, such as Vallejo, did not adjust required payments/debts to Calpers. Eventually, Calpers is going to run into a situation they can't finesse, though.
Many states have statutes and constitutional provisions making it illegal to cut public workers’ pensions. Until now, there has not been a prominent test of those laws in bankruptcy — particularly not in California, where the big state pension system, known as Calpers, has been girding for battle on the issue, trying to avoid the precedent of a cutoff or shortfall in a city’s pension contributions.
Federal bankruptcy law often trumps state laws, but municipal bankruptcies are so rare that there is almost no precedent on how to apply the law to state pension provisions.
We'll see just how rare these bankruptcies will be, especially in California, in the coming years.
Previous posts on Stockton:
March 2012: Falling off the Cliff – Public Finance
March 2012: California Pensions, Hoping the Dog Doesn't Bark
June 2012: Intersecting Threads – Bankruptcy, Pensions, and Higher Education Bubble
July 2012: Least Difficult Warren Buffet Prediction
August 2012: Muni Watch – All Signs Point to Doom
August 2012: Even More Bad Public Finance Ideas: Capital Appreciation Bonds
September 2012: Public Pensions – Everybody in the Pool!