Bond issuers say Stockton put pensions ahead of obligationsNews added by Benefits Pro on August 13, 2012

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By Andy Stonehouse

The financially embattled city of Stockton, Calif. - whose recent claim of bankruptcy began a trend in other broke California communities - is now being challenged on the credibility of its bankruptcy claim. The city is instead being asked to chop its pensions rather than saddle outside companies with the debt.

According to Reuters, two of the city's bond issuers have called the bankruptcy into question as it left pensions intact, favoring the California Public Employees' Retirement System over the bond debt obligations.

CALPERS is the country's largest public pension fund, and has recently announced its own troubles as its $234 billion pension system, serving 1.6 million state employees, only saw a 1 percent return on investments last year.

If the claims from National Public Finance Guarantee Corp. and Assured Guaranty are pursued further in court, some say it sets in motion the potential for a legal battle that could directly attack the solvency of other public pension systems, which are already suffering from low return rates.

Critics note that CALPERS has thrown its not inconsiderable weight around in the past, threatening legal battles if municipalities try to short on their pension obligations to try to fix their other financial problems.

"It's the equivalent of declaring a war (on pensions)," San Francisco attorney Karol Denniston told Reuters.

One of the claimants, NPFGC, insured almost $100 million of Stockton's bonds, and says the city did nothing to negotiate with CALPERS to cut the city's pension obligations.

Those obligations, the insurer said, represent a financial liability, just like debt service payments and should be treated equally.

"The protection of CALPERS benefits for the mayor, city council and other city employees is clearly not in good faith," the insurer noted in its filing. "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."

San Bernardino, Calif. also recently declared bankruptcy but did so in an emergency filing that precluded the negotiations now underway in Stockton; the Eastern Sierra ski community of Mammoth Lakes also declared bankruptcy this summer.

Moody's Investors Service said that the wave of bankruptcies may set a difficult precedent.

"Historically, U.S. cities have considered bankruptcy as the very last resort to managing fiscal problems. The recent uptick ... could signify not only a lack of abilty, but a lack of willingness to pay debt service at the expense of other financial obligations."

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