Wall Street has taken notice of municipal bankruptcies, and now it appears that the courts may become involved as well.
The question is whether or not pension commitments can be annulled when bond insurers come asking for their payments. In a column published by the Sacramento Bee, Stockton is used as an example of a city that borrowed $125 million from the bond market five years ago to cover increases in pension benefits. The city pays $29 million a year to the California Public Employees’ Retirement System to cover its annual pension obligation.
Stockton has filed for bankruptcy, but to date has not put CalPERS, the nation’s largest public pension fund, on its bankruptcy list of creditors. Columnist Jon Ortiz writes, “Bond insurers say the city should cut CalPERS payments along with those to other creditors.”
Moody’s credit rating agency estimates 10 percent of California’s cities “have declared financial crisis.” Even Warren Buffet has left the municipal bond insurance business, signaling that the once-reliable municipal bonds are now risky business. Ultimately we will witness a battle between the bankruptcy law experts and those who are defending public pension obligations.
The future of education, public safety, libraries, and many more basics are at stake. At the end of the day, I don't think either side will be able to declare victory.