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  • dhhtuis23 dhhtuis23 Aug 10, 2012 1:48 AM Flag

    WSJ - Challenges to Stockton Could Affect Pensions of Insolvent Cities

    Legal challenges Thursday to Stockton, Calif., from two of its biggest creditors over the city's pension obligations has implications for how cash-strapped municipalities deal with retiree benefits during insolvency.

    National Public Finance Guarantee Corp., an Armonk, N.Y.-based unit of bond insurer MBIA Inc., filed a petition in U.S. Bankruptcy Court in the Eastern District of California objecting to Stockton's decision not to seek concessions from the California Public Employees' Retirement System before filing for bankruptcy protection in June. National Public Finance said this was unfair given that "similarly situated creditors were asked to take reductions."

    Bond insurer Assured Guaranty Corp. also filed a challenge to the city's bankruptcy filing, arguing in part that the city should have sought concessions from Calpers.

    "The objections filed, thus far, do not address a myriad of issues that we, as a city, must be sensitive to," said Connie Cochran, a spokeswoman for the city of Stockton, in a statement. She said municipalities have to restructure "through the prism of maintaining basic health and safety for our community."

    The two creditors' challenges aim squarely at retiree pension benefits, which have been a sacred cow for many municipalities despite falling revenue and the increasingly heavy burden of pension payouts.

    How Stockton resolves the issue of pension benefits "will be very informative," said Richard Larkin, credit analysis director for Herbert J. Sims & Co., a bond underwriter in Iselin, N.J. "Nothing like this [about pensions] has been worked out in bankruptcy court before, and whichever way it is resolved, it could have far-reaching implications."

    Mr. Larkin said if Stockton is forced to restructure its pension obligations, other California cities could seek similar changes.

    Vallejo, Calif., which filed for Chapter 9 protection in 2008 and emerged last year, restructured all of its debt during the bankruptcy proceedings--with the exception of its pension costs, preferring to continue making full payments to retirees.

    Stockton contributes about $10 million annually to an investment fund operated by Calpers, a state-run retirement system for more than 3,000 municipalities, but these payments don't cover what Calpers pays out to Stockton retirees. As a result, Stockton's debt to Calpers totals $147 million.

    It is unclear if Calpers would reduce payments to Stockton retirees if the retirement fund agreed to accept less than the $147 million it is owed.

    Brad Pacheco, a spokesman for Calpers, said in a statement that the retirement system "remains committed to safeguarding the constitutionally protected pension benefits of the city's employees and retirees."

    Stockton, the biggest-ever U.S. city to seek bankruptcy protection, owes $90 million to National Public Finance and about $160 million to Assured Guaranty. The city of 300,000, located 80 miles east of San Francisco, owes creditors a total of more than $700 million.

    Chapter 9 of the U.S. Bankruptcy Code provides a financially distressed municipality protection from creditors while it develops a plan for adjusting its debts. The filing bars creditors from demanding a liquidation of assets to repay the municipality's debts.

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