CalPERS is defending government workers against criticism of their benefits even while it risks losses as municipalities, faced with rising retirement costs, file for bankruptcy.
The $238.4 billion pension fund is the largest creditor in Chapter 9 bankruptcy cases filed by two California cities, Stockton and San Bernardino, since the end of June, with a total of $290.8 million in payments to the system at stake.
Increasing retiree obligations are straining budgets of cities across the Golden State, still grappling with income- and sales-tax revenue reduced by the longest recession since the Great Depression. The two bankrupt cities represent 0.7% of employer contributions to CalPERS, according to actuarial statements. Still, others may follow if judges relieve them of pension commitments, said Karol Denniston, a bankruptcy lawyer at Schiff Hardin.
Stockton and San Bernardino both cited rising employee retirement costs as factors that drove them to seek court protection. A third community in bankruptcy, Mammoth Lakes, hobbled by a legal judgment, owes CalPERS $4.2 million, according to its filing.
“Where this is so important is that we know Stockton is going to be precedential,” Ms. Denniston said.
Stockton is trying to become the first American city since the 1930s to use bankruptcy to force bondholders to take less than the principal they’re owed. The city will need approval from a federal judge in Sacramento to impose any cuts on creditors.
In an Aug. 2 statement responding to insurer Assured Guaranty’s objections to Stockton’s bankruptcy filing, CalPERS General Counsel Peter Mixon argued that the interests of pensioners should trump those of other creditors.
“The obligations owed to the public workers of the city have priority over those of general unsecured creditors including bondholders,” Mr. Mixon wrote. “Unlike insurance companies, policemen, firefighters, and other public employees are not in a position to evaluate credit risk of their employers.”
“The briefs that have been filed by the insurers are interesting in that they’re arguing that CalPERS should be treated like any other creditor,” Ms. Denniston said by telephone. “CalPERS is going to argue that they’re a different kind of creditor, in that they hold the money in trust for the retirees.”
Even as it defends its standing in the Stockton case, CalPERS is working to counter the notion that pension costs are a significant factor in current and potential municipal bankruptcies.