(August 2, 2012) – The claws are out between the California Public Employees’ Retirement System (CalPERS) and insurer Assured Guaranty, both jockeying to be first in line for bankrupt Stockton’s remaining cash.
Stockton, California, is the largest American municipality ever to seek bankruptcy protection—a process which has aroused unprecedented legal issues. In 2007, Assured Guaranty backed a $125 million pension-obligation bond issuance for the city, and now holds $161 million in exposure to the Stockton paper.
The city intends to maintain its pension contributions to CalPERS, while eliminating debt service on the bonds. According to Assured Guaranty, wiping the debt payments would constitute an 83% haircut on the bonds’ principal. (Perhaps that’s more of a waxing?) On Wednesday, both CalPERS and Assured Guaranty issued statements criticizing one another’s claims to Stockton’s cash. And they got personal.
“While Stockton rightfully complains about CalPERS’ investment underperformance since it will further increase the City’s unfunded pension liability, CalPERS’ performance does not diminish the value provided by the Pension Bonds,” the insurer said in its statement. “If Stockton is disappointed with CalPERS’ investment performance, it should be taking that up with CalPERS rather than reneging on the City’s obligation to holders of the Pension Bonds.”
CalPERS shot back, pitting Assured Guaranty against retired police and firefighters. “As a successful long-term investor with an average annual return rate of 9% over the past 30 years, CalPERS is committed to working with the City of Stockton and other public agencies during these turbulent economic times,” said pension system’s General Counsel Peter Mixon in the statement. “The obligations owed to the public workers of the City have priority over those of general unsecured creditors including bondholders. Unlike insurance companies, policemen, firefighters and other public employees are not in a position to evaluate credit risk of their employers. Assured Guaranty is in the business of evaluating these risks. CalPERS is committed to working within the legal system to reach resolution of these difficult issues.”
Assured Guaranty argues that what little precedent exists sides with the insurer. “Among the small number of municipalities to file for bankruptcy (43 since 1981), none of the cases resulted in implementing cuts to principal owed bondholders.” The statement continued, “Stockton’s attempt to transfer the cost of lucrative, above-market employee wages and benefits granted when tax revenues were flush to capital markets creditors by haircutting bond principal is unprecedented, a contortion of the bankruptcy process and will foreclose Stockton’s access to the capital markets for the foreseeable future.”
Stockton, CalPERS and Assured Guaranty are venturing into uncharted territory, and will no doubt serve as a guide for future municipal bankruptcies. Creditors have until August 9 to challenge Stockton’s eligibility for Chapter 9 protection, according to city officials. Assured Guaranty indicated in a June statement that it will take the matter to court if necessary.