Two bond insurers have challenged Stockton’s eligibility for bankruptcy, arguing that the city can cut pension benefits — a move that could have profound implications for the entire state.
The court filings set a roadmap for a battle, in or out of bankruptcy court, in which Wall Street takes on the largest public U.S. pension fund, the California Public Employees’ Retirement System, as troubled cities and counties watch closely.
A unit of MBIA Inc. told the court that the city’s failure to ask for concessions from its biggest creditor, CalPERS, showed that it had not negotiated in good faith, and it argued that the city’s plan for recovery was doomed because it did not touch pensions.
Assured Guaranty, in a separate filing, also contended that the city undermined its case by favoring CalPERS and said Stockton had not proven insolvency.
CalPERS has used warnings of court battles to dissuade municipalities from considering pension cuts, but retiree benefits are constricting many cities. San Bernardino also faces major pension obligations and is following Stockton’s bankruptcy path.
“It’s the equivalent of a declaration of war,” said Karol Denniston, a San Francisco lawyer who helped draft California’s bankruptcy-process law.
Mushrooming pension liabilities also loom on the horizon for many other California cities, even those nowhere near declaring bankruptcy, such as San Francisco and Oakland.
A federal judge must approve Stockton’s eligibility for Chapter 9 protection before the city can reorganize its debts under court protection, and a primary criterion is whether the city made a real effort to avoid a bankruptcy filing.
National Public Finance Guarantee, a unit of MBIA that insured nearly $94 million of the city’s revenue bonds, said Stockton had not negotiated with CalPERS at all, and that its initial proposal to creditors showed a financial shortfall for 2013-14, even after bond payments were cut.
The insurer blamed pension costs for the shortfall. Those pension payments represent a financial liability, such as debt-service payments, and should be treated equally, it said.
Assured Guaranty argued that the plan was especially unfair because the city issued pension-obligation bonds to make payments to CalPERS and now wants to abandon the bonds. That would leave the insurer covering $100 million of principal.
“The city took the bondholders’ money to give to Calpers, and now proposes to leave those funds with Calpers and pay Calpers everything else Calpers decides the city owes,” it wrote.