Stockton California Defaults, Puts Investors at the Back of the Line

January 1, 2013
By

STOCKTON CALI

“Follow the rules.”

~ FDR

Stockton filed Chapter 9 on June 28, making it the nation’s largest city to seek bankruptcy protection. Overspending and high employee pay could no longer be sustained once the recession and meager recovery hit. In addition, Governor Jerry Brown uses the cities like an ATM for his overspending. He has even manipulated bankrupt Stockton into paying the state over everyone else.

Out-of-control entitlement programs have attracted and supported the non-producers and a whole lot of criminals in Stockton. Entitlement programs often become a self-fulfilling prophecy. They are meant to help the poor but they actually encourage poverty when they are over-utilized.

Stockton, California won’t do what they need to do, which is to restructure their pension payouts and deal with their entitlement programs.

Instead, they have decided to default.

Bondholders who invested in the belief that they were given certain guarantees will be left holding the bag as the unions, whose pensions are part of the problem, give up nothing according to investors.

The police in Stockton do deserve a lot of consideration, however, because Stockton is a dangerous place. Recently, the California Highway Patrol were diverted to Stockton to assist the overwhelmed police with the violent crime. The jobless rate keeps rising and is up to 18.4%.  Many people are dependent on food stamps and unemployment insurance and still others resort to crime.

Stockton’s property values have sunk and their crime rate and unemployment is up. All of this is predictable in an entitlement state. Stockton politicians turned paradise into hell, but they are only the first city to meet this fate. There will be others.

If the investors lose, who will invest in Stockton every again? If Stockton’s bond rating is downgraded, which is likely at this point, their interest rates on borrowing will be astronomical. The federal government will make us all pay in the end.

The World Socialist Organization is quite upset because a judge might rule against the “workers” and demand they shed pension liabilities as the creditors seek refuge in the court system.

Stockton has already defaulted on bonds and they plan to default on more, which means people who followed the rules and who trusted the rules would be followed will lose their investments because Stockton will NOT end their profligate ways.

Early in 2012, Governor Jerry Brown forced Stockton to pay up every 6 months while cities figure their budgets annually. Brown wants the money to fill in the gaps in his own unsustainable budget deficit. As a result, Stockton, and many other California cities, have been forced to abolish arms of local government to pay Jerry Brown.

Stockton was forced to abandon its redevelopment agency.

Normally, by law, when an arm of government is abolished, bond holders get paid first, but Governor Jerry Brown is bullying and manipulating the cities into paying him – the state – first, and using the money for his other projects which he can’t afford.

Stockton has suffered from a 65% loss in property taxes in some areas as one example of where their spending has led them.

As bond holders battle Stockton in court for what is legally due them, Stockton approved a new police contract which exchanged the police $13 million lawsuit for a few extra vacation days. Another minor lawsuit with the police union was also settled.

Creditors, who will lose millions they invested into Stockton, objected in court papers. They believe the city is skirting the bankruptcy procedure which demands all creditors be treated fairly.

“If Chapter 9 means anything, it means that a debtor cannot sidestep the plan process so easily and effortlessly,” attorneys said, accusing the city of secret dealing.

The creditors claim that few austerity measures were taken before filing Chapter 9 bankruptcy proceedings and that they did not ask California Public Employees’ Retirement System, the city’s largest creditor, to renegotiate its contract.

They also contend that the city is making an end-run around the bankruptcy process by resolving lawsuits of their choosing outside of the court leaving other creditors holding the debt.

On December 19, 2012, one creditor said that City Manager Bob Deis and his team put their personal interests first. Deis and his fellow executives, they say, did not take on the California Public Employees’ Retirement System because they are members of the same retirement fund and would lose personally. [That's not a big leap to think that.]

Deis denied he gave that any consideration.

“What did I recommend we do with that mess?” said Deis, critical of the creditor’s argument spelled out in a 20-page document. “The brief never speaks to that.”

Creditors issued $700 million worth of bonds to Stockton in good faith and they are now lucky to get pennies on the dollar. They believe that Stockton did not negotiate in good faith with the unions.

This reminds me of the GM auto suppliers and creditors. They were moved from the front of the line to the back, giving the voracious unions first place. Unions are socialist by nature and creditors are free market.

We are moving the free market to the back of the line and moving the socialists to the front.

If the unions and Stockton win this one over the creditors, many other failing cities will follow suit. Goodbye free enterprise, hello unaffordable entitlement state.

Read about the court filings and creditors at recordnet.com

 

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