The recent war of words between the California Public Employees’ Retirement System and a Bermuda- based bond-insurance company called Assured Guaranty Ltd. (AGO) has made it clear that California officials would rather stiff bondholders than trim even the most generous pension benefits promised to public-sector workers.
The debate centers on Stockton, California, the largest city in the nation to declare bankruptcy. In its initial proposal to creditors, the city would fully fund its pension system while walking away from $124 million in debt from pension-obligation bonds it floated in 2007.
Stockton couldn’t meet its financial obligations to pay for enhanced pension benefits five years ago, so it borrowed the money. Rather than cut unsustainable benefit levels while it has the chance to do so now, officials there would rather default on the $103 million it owes Assured (AGO) Guaranty.
Stockton and other Californian cities have slashed public services, thus putting the demands of public employees above the concerns of taxpayers and residents who rely on public services. Now we see that even bondholders don’t stand a chance when their interests collide with those of public-sector unions.
It’s easier to take on an offshore firm than confront CalPers, which had threatened to wage a protracted court battle against another Californian city, Vallejo, if it decided to reduce pension promises after its 2008 bankruptcy. Stockton officials no doubt are aware of that threat.