Bond holders coming for your pension E-mail
Written by Mark Nichols   

The pension killers seem to have decided that the battle for public opinion is already won. The sheer number of cops who backed Wisconsin Governor Scott Walker in his recall election earlier this year certainly backs that assertion up.
Now that the public relations war has been won, groups that oppose defined benefit plans for public sector employees have moved on to the courts. That’s where the real action is.

According a recent article in the Sacramento Bee, “City bankruptcies filed by Stockton and San Bernardino have awakened municipal bondholders and bond insurers, who are now bent on testing commonly held notions that public pension promises can't be broken.”

"The law is far less clear than you'd think," said Douglas Baird, a pension law expert at the University of Chicago.

The obvious conclusion? Sometimes a deal isn’t necessarily a deal.

Years ago politicians were terrified of being painted as “soft on crime.” Now they fear being labeled soft on unions and “big labor.” That’s why you see so many Democrats, the traditional ally of labor, jumping ship.

Gov. Jerry Brown recently released a plan to make changes to pension plans saying, "the arithmetic doesn't add up." Other Democratic governors like Deval Patrick from Massachusetts are making similar moves. Whether they’re doing so based on politics or personal conviction is anyone’s guess.

As an increasing number of American cities file for bankruptcy, Wall Street is looking at these municipalities the way a wolf might look at a duck.

In Stockton, California for instance, the city pays $29 million a year to the California Public Employees' Retirement System to cover its annual pension obligations.

Stockton borrowed $125 million from the bond market five years ago to pay for a pension benefits hike. City leaders haven't put CalPERS on its bankruptcy list of creditors. That means they aren't likely to be paid in full.

Bond insurers, like Warren Buffet, until recently, say the city should cut CalPERS payments along with those to other creditors.

CalPERS, the nation's largest public pension fund, plans to file its rebuttal soon.

But let’s look at the worst-case scenario and Stockton stiffs the fund just like its other creditors.

"Ultimately, if the employer can't pay us, the employees suffer," CalPERS spokesman Brad Pacheco said. Because the fund simply facilitates whatever pension agreement is worked out between a city and its workers. "We're positioning ourselves in court to protect our members."

In other words, if the city goes under, the pensions are sure to follow.

Moody's, one of the nation's top credit rating agencies, figures about 10 percent of California cities have declared fiscal crises. Many could wind up in bankruptcy. Warren Buffett recently got out of the municipal bond insurance business.

It's telling that one of the world's most savvy investors thinks municipal bonds today are a bad bet.

Bankruptcy law v. pension fund law is going to be a bloody and protracted battle. Wall Street lawyers don't care if CalPERS' assets are $30 billion shy of its obligations – or $300 billion.

They're about limiting clients' like Buffet’s losses and maximizing clients' gains.


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