By Peter Henderson
SAN FRANCISCO (Reuters) - Bond insurer Assured Guaranty, facing massive losses in Stockton, California's bankruptcy, on Wednesday said the largest U.S. public pension fund, Calpers, was getting preferential treatment among creditors.
That may set the stage for a fight over whether cities in dire circumstances legally have the ability to change obligations under pension plan benefits agreed to in much better times. Calpers, the California Public Employees' Retirement System, so far has said that the cities don't have that ability.
A Stockton proposal to creditors in May, which was made before Chapter 9 proceedings began, showed the city on the far outskirts of the San Francisco Bay Area was ready to fully pay pension fund payments but largely abandon payments on $121 million of pension obligation bonds backed by Assured Guaranty.
Assured calculated that the loss on bond principal would be 83 percent. That amounts to $100 million, which Assured would have to cover.
Stockton, with about 300,000 residents, is the biggest U.S. city to seek bankruptcy protection. The housing crash and widespread unemployment have decimated revenue for the city, which also is struggling with the costs of generous retiree benefits and failed development projects.
"The City's Pension Bonds are proposed to be permanently cut by 83 percent, while its other personnel costs are proposed to be temporarily reduced by 6.6 percent," Assured said in a statement on Wednesday, its first comment since Stockton published its May proposals on July 20. Stockton called the proposals "The Ask."
"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," the company added.
Stockton lost money on the pension bond issue when Calpers investments soured. "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 General Counsel Peter Mixon responded that the fund had a good track record for investing and that pension benefits had constitutional protections.
"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," Mixon said in an emailed statement. The fund had an average annual return of 9 percent over the past 30 years, he said.
Assured made no counterproposals during the pre-bankruptcy negotiations, added Stockton attorney Marc Levinson. "Instead of issuing counterproposals, it is issuing press releases," he said.
Stockton has not left retirees alone: it plans to quit paying for retiree healthcare, following the lead of another California city, Vallejo, which went bankrupt a few years ago. Vallejo also continued making full payments to Calpers, the California Public Employees' Retirement System.
Assured, in statements on Wednesday and in June, has raised the prospect of a court fight.
"Stockton's 'Ask' in relation to the Pension Bonds is fundamentally unfair, discriminatory relative to its other personnel costs and inconsistent with chapter 9's strict requirements for plan confirmation," it said.
Creditors have until August 9 to challenge Stockton's eligibility to get Chapter 9 protection.
(Reporting By Peter Henderson; editing by Carol Bishopric)