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The end game for California cities will be a battle between owed pensions versus bond holders. Both Stockton and San Bernardino have proposed forcing bond holders to suffer a loss of principal. Needless to say, the bond holders have not agreed to the haircut.

Stockton’s official plan calls for them to maintain all payments to Calpers and pension promises to employees. So far, Stockton has continued to send regular payments to Calpers.

The BIG NEWS today is that we learned San Bernardino has STOPPED sending its payments to Calpers. [1] So far, they have missed $6 million in payments. They have also missed principal and interest payments on many bonds.

This is the first time that any municipality has made a direct challenge to Calpers and their pension promises. I am sure Calpers is not happy about it.

The near unanimous opinion from bankruptcy and pension lawyers is that the pension versus bond holder debate will end up at the US Supreme court in a few years. Both sides are very entrenched in the Stockton and San Bernardino cases. It is not the bond holders so much as it is the bond insurers, led by Assured Guaranty. And Calpers has not only a huge war chest, but also strong support from all current and retired public employees.

The bankruptcy judge for Stockton, Chris Klein, has openly talked about the challenges of the case. A hearing is scheduled for January regarding whether Stockton is even eligible for BK. The bond insurers argue that since Calpers obligations were NOT given haircuts, Stockton does not have the necessary requirements to file BK.

IMO, the Stockton and San Bernardino cases have wide ranging implications on how the muni obligations will get resolved. My crystal ball is very cloudy so I offer no opinion. . .

This should be front page news for all financial media outlets, but seems to have been ignored so far.



[1] Reuters story on San Bernardino Bankruptcy
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