CalPERS Pension System in the Crosshairs of Stockton Bankruptcy Dispute

A few days ago a federal judge sided with the city of Stockton, validating its bankruptcy. See Judge Rules Stockton CA Bankruptcy is Valid, City Acted in Good Faith.

Bondholders screamed, but the ruling made sense. What did not make sense (except from the point of view of politicians protecting their own undeserved pensions), was that while Stockton defaulted on other payments, it kept funding its CalPERS pension obligations.

Shouldn't government employees who were responsible for this mess share some of the fallout? I think so, and I would suggest before other bondholders or at least equal to other bondholders.

The issue now is whether federal bankruptcy takes precedence over California law. 

CalPERS in the Crosshairs

The Huffington Post describes the setup in Stockton Pensions Present Problem In Bankruptcy

At the conclusion of a three-day trial, a judge on Monday formally granted the city Chapter 9 protection, over the objections of creditors who questioned whether it was fair for the city to fully meet its obligations to the state pension system while other debt holders go partly paid.

The issue – whether federal bankruptcy law trumps the California law that requires pension fund debts to be honored – could have huge implications across the state and the rest of the nation, experts say.

"The fear is that there is going to be a run on the bank," said bankruptcy attorney Michael Sweet, who has been monitoring the Stockton trial. "Everyone is going to be cutting CalPERS" payments if Stockton is allowed to do it.

Last year, the Congressional Joint Economic Committee reported that unfunded pension obligations across the nation amount to more than $2.8 trillion and may be as high as $4.4 trillion. Illinois lacks funds for nearly 72 percent of the pensions it guarantees, while California and Texas are short by more than half. North Carolina's debt is lowest but is still more than a third short of what its system has promised to pay out.

Either the judge will decide that CalPERS obligations must be cut and the state will appeal, or he will say state law forbids CalPERS from negotiating and the creditors likely will appeal.

Throw CalPERS in the Pot

In spite of this huge runup in stocks and bonds, pension funds are still underfunded by a minimum of $2.8 trillion. If these undeserved pensions have priority, taxpayers will be on the hook for them.

For the sake of the average taxpayer, let's hope CalPERS is thrown in the mix and benefits are not just cut, but massively slashed, and those who have the highest benefits cut the most.

Stockton argues it needs high benefits to maintain its workforce. That is like saying you need cancer to save your breasts.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
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