Stockton could be a trendsetter


20120712-211456.jpgAs America holds its collective breath other municipalities wait to get in line for bankruptcy protection.

 

Stockton Ca. has entered into a mediation period before it can file for bankruptcy. The city, state, employees, retirees and bondholders — not to mention the citizens — have a lot riding on how the story unfolds. Thid could have major consequences for public employee pension plans and bondholders Across the country.
Contributions to public employee pensions, as well as debt service on bonds earlier sold to fund its pension contributions. The retirement-related annual payments by the city amount to about $37 million of its total budget of $196 million, not including another $17 million spent on retiree health care. With only $1 million left in its cash balances, the city is on the brink of collapse.
The major creditors are likely to be a jurisdiction’s retirees and current employees that have unfunded pension or post-retirement liabilities. The question that likely will be faced if the Stockton bankruptcy goes forward is the ability of a government to retroactively change contract provisions that have promised benefits and required levels of contributions to fund pension plan commitments. Governments have an interest here, too: If a state allows the bondholders to be pushed behind in the line, credit ratings will suffer and borrowing costs will go up for everyone in the state.
The major players as Stockton’s unraveling continues are likely to be the public employee unions and the state’s giant public employee pension program, the California Public Employees’ Retirement System. The key issue: Are the pension fund benefits and required contributions constitutionally protected? If the Stockton case lands in a federal court, will the state law prevail over that of the bankruptcy court as it works out an equitable recomposition of the debt?
The stakes of a confrontation between public pensions and bondholders are potentially very high. State and local governments have $3 trillion in municipal securities outstanding, with perhaps $1 trillion of this amount representing general obligation debt. Meanwhile, state and local pension systems have an estimated $1 trillion to $2 trillion in unfunded liabilities, depending on how one calculates the liability.
The growing number of fiscal difficulties — the aftermath of the Great Recession — should not be misinterpreted. Painful reductions in spending are going on, and governments are deleveraging by paying off debt and growing more reluctant to borrrow. Moreover, they are not defaulting on bond repayments. Bankruptcy rescue operations may lead to questions about the pecking order of various forms of obligations. The range of indebtedness now extends to the pension fund and post-retirement health benefit liabilities. States and localities have shown a growing appetite for altering pension agreements, but to date have usually avoided changes affecting retirees and current employees. Faced with the need to deleverage obligations, such actions may no longer be possible.

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About Commish Greg

I have had a life long love affair with the New York Yankees and baseball period. In my retirement I've discovered the hobby of sports game simulation through online gaming. I also have collected cards and memorabilia since I was 7 years old in 1961. I inherited from my uncle the collections starting from 1956 - 1960 and in 1961 I started my own collecting. I started an online league through Out Of The Park Development and their game OOTP16. The name of the league is the Alternate History Baseball League and it began in the 1954 baseball season when I and fifteen others held an inaugural draft and began the AHBL league in earnest. In my blog I will review the AHBL league and also mix some pop culture and historic events from real life. I hope you enjoy !
This entry was posted in Conservative, Finance, Liberal, Liberatarian, News, Opinion, Politics, State and tagged , , , , . Bookmark the permalink.

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