Bond Insurer MBIA Is Contesting Stockton’s Bankruptcy Filing

As many California cities are falling to bankruptcy, the blame game is heating up. Most municipalities are blaming lucrative employee contracts with unsustainable pensions through CalPERS as the cause of financial difficulties leading to a bankruptcy filing. The employee unions are pushing back stating that it submits management of funds and has nothing to do with their contracts. Today, the bond insurer, MBIA, filed a motion with the bankruptcy court contesting Stockton’s bankruptcy filing. The argument was made challenging the city’s ability to file for bankruptcy under new laws because it failed to ask for any concessions from the CalPERS pension fund. They further stated that this city did not negotiate with their creditors in good faith and argued that the plan the city filed in bankruptcy court was doomed to fail because the pensions were not addressed.

Previously, the bankruptcy attorney for Stockton had said that bond insurers didn’t make any counterproposals to the bankrupt city prior to filing bankruptcy as mandated by a new state law.

This filing should set a precedent for a municipality bankruptcy as Wall Street takes on CalPERS. CalPERS is currently the largest US public pension fund and has been a thorn in the side of many cities that were filing bankruptcy. Recently, CalPERS has threatened cities from even considering touching retiree benefits. So .

According to bankruptcy attorney, Karol Denniston from San Francisco that helped a California bankruptcy law, “It’s the equivalent of a declaration of war on pensions. It affects every minute municipality looking to restructure. It affects every municipality looking to restructure.”

MBIA is the insurer of Stockton’s revenue bonds to the tune of $94 million. It seems they have the most to lose in this bankruptcy filing and have reason to be concerned about the unsustainable pensions that have not been addressed in bankruptcy. They believe that the pensions are nothing more than a financial liability and should be treated equally with debt service payments. According to bankruptcy court documents the debt service payments total $11.3 million and account for 44% of concessions in 2012 2013 year. CalPERS obligations total $17 million for this year and are expected to rise to $30 million in the next five years.

The only way municipalities will be able to budget in the future is if they get away from a defined benefit and go to a 401(k) program for their employees. Defined benefits leave the taxpayer on the hook for any losses they CalPERS might incur due to a downturn in the investment market.

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