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Steven Greenhut
Stockton’s Moral Deficit « Back to Story

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jay Hoenemeyer says, "The 'bondholders' are essentially safe from Stockton's shenanigans . Their claim is against Assured who guaranteed the city's debt"
It could be a problem if other municipalities follow suit and declare bankruptcy to shed their debt obligations as well. Assured could end up out of cash and in bankruptcy itself. Currently few municipalities default, but depending on the Stockton and San Bernardino decisions that could change. A default by a major city or county insured by Assured would be very costly. Assured currently has an Aa3 credit rating but Moody's said it is reviewing it for another possible downgrade. A downgrade means less bonds it can insure in the future which hurts future revenue streams.
If CalPERS wins over bondholders then the city and residents are in big trouble. As the city starts falling into disrepair or has a natural disaster where will it get money for repairs? From the pensioners?
Bon temps - I agree Assured used bad judgment ("municipalities almost never default"), but I bet they did not count on taking an 83% principal reduction while the unions (at the same level of priority in the bankruptcy court) are set to take only a temporary 6.6% reduction, with plans to restore the union workers' compensation in full by 2015-16. Again, I ask how is that Stockton expects to recover without any access in the future to credit? And one can only imagine the spillover effect as credit is tightened for other municipalities (likely not a concern of Stockton's right now).
Ken's comment:

"The only way people learn anymore is through catastrophe."

I think that's the point, that catastrophe doesn't lead to change - rather the reverse is true. Look at Detroit - what has been learned from that disaster? That's an easy answer - NOTHING - have you heard of otherwise?

Same with other places, like my city - Newark, NJ - almost half a century after the riots trashed this once gorgeous city I learned from an associate who briefly rented an apartment on Broad Street (city's main street) while going to law school that one simply did not go out at night, that you could hear occasional gun fire, and walking the streets was taking your life in your hands. This nearly HALF A CENTURY since the 1967 riots, and the one party system - Democratic - in Newark has not made the city livable despite billions and billions spent.

Nothing is ever learned since there's no pressure on anyone to do so - the media has adopted standards under which certain issues are ignored, and certain people never criticized. This self created silence ensures that nothing changes. Combine that with corrupt one party Democratic rule and you can sure that catastrophe never leads to change. The result is misery and racsim of a sort comparable to the worst the South had to offer.

Or maybe someone will tell me why Newark, Paterson, Camden and other places have criminalized communities, schools that don't teach (and my brother-in-law taught there so I know what I am talking about) despite billions spent - here in New Jersey the Abbott court decision, which led to billions for new schools, hasn't improved education one bit - why?

Plus of course no jobs for residents, since Obama was elected no one even talks about jobs in the cities since to do so would be to imply that we aren't doing great economically - a concept that's pure poison to Democratic media. Even in Atlantic City, where the law allowed the casinos to be built, employers were forced to build "intercept" parking lots on the outskirts of the city since workers couldn't be found in the city. Why?

If 50 years isn't enough, and countless billions aren't enough, isn't there something fundamentally wrong with the approach? And why isn't anyone - ANYONE - talking about it? (of course we know the answer to that question).

In the late sixties I lived in the Bay Area and once drove over to Stockton because I had a college friend who grew up there and who's family still lived there. My recollection of the city is of a pleasant place with well-kept modest homes. WTH have we done to these places that were built with so much hard work and (real)hope for the future?
This is good news. It is time we bring this idiocy to the forefront. It is going to be wonderful when the California state government itself goes bankrupt. We need a lesson in basic economics and responsible public policy. The only way people learn anymore is through catastrophe.
If Stockton is morally bankrupt, what are the US and the West generally? Borrowed money anyone could tell could not be repaid. Now printing money like mad the create inflation as a "Bankers" way of defaulting on the repayment in real terms.
First thing, Greenhut misstates the process that produced these admittedly over-generous pension liabilities: "[Stockton city government] structured its public-employee pensions in a way that guaranteed multimillion-dollar retirements for police officers and firefighters after a few decades on the job."

Those contracts were reached under binding arbitration. Then sealed with court orders. Bankruptcy law was and remains largely silent for dealing with this particular problem.

Undue union participation in local politics may have happened, but if so it was irrelevant to the mandated arbitration system. Police and fire contracts are usually reached through state arbitration.

As to the management at Assured, what were they thinking ??? Stockton was already in the tank when they tossed in the $125-million. Stockton would have failed any sensible effort at due diligence.
Michael Fitzgerald, I don't see the unfairness in the comparison between a spendthrift individual and a spendthrift government. You cite widespread foreclosures as the cause of Stockton's fiscal woes, but why were there so many foreclosures? Wasn't it because so many homebuyers overbought and overborrowed, on the risky assumption that the appreciation on Stockton houses would continue? Meanwhile, the city enjoyed the run-up in property taxes, taking on financial commitments when times were flush, on the same risky assumption. Today, houses in Stockton sell for about the same price as in 2001 so presumably the city could revert to a 2001 budget if it hadn't mortgaged its future with so many new financial commitments--just like so many overconfident homebuyers.
What's new? The unions and their fake city government bosses are all in the scam together. They share the same pot of 'stolen' money they intend to use for their retirement. Just the normal California practice of two crooks splitting the loot taken from first the idiot tax payers and now the greater idiots who loaned these thugs more money.
On the east Stockton, you will find trailer park white trash, cholos and ghetto thugz, with very few nice & quiet areas. On the south side, you will find cholos and thugz. In the downtown area, one will find Southeast Asians, poor white, black & latino. On the northside, you will find Southeast Asian gangs, thugz, cholos and even some poor whites. This is the reason for white flight.
Sounds like Compton wants to go the GM route; whether legal or not.
A couple of points of clarification . The ' bondholders' are essentially safe from Stockton's shenanigans . Their claim is against Assured who guaranteed the city's debt . They may have to wait a while/years to get their cash but they will get their cash . Any rating these bonds carried was based on the credit strength of Assured and strength of the contract between the bonholders and Assured . What is most troublesome is the damage done to bankruptcy law with this make it up as we go along litigation . But Stockton is small change to the damage done by the Chrysler and GM takeovers. Mourdock , as Indiana's atty gen , fought that bit of thuggery in the courts and his video account , available , I believe , on Cato's video archives is chilling . The Republic was founded on the principle that it would be a nation of laws and not men . Little by little , we are losing that .
God bless you Steve for being a true patriot and exposing the union and government corruption that is contributing to the destruction of our state and country.
Interesting case. The legal precedent is critical, as absent any obligation on the city to get its house in order before declaring bankruptcy, then what's to prevent any agency of gov't from doing the same i.e. running up big debts and thumbing its nose at crediters by declaring bankruptcy? There is also th eproblem of courts upholding government promises to employees. however unaffordable.

However, if the lenders get screwed in Stockton (no other word for it) it will have an impact on the ability of other cities, states etc. to borrow - the enhanced risk would be factored into and added onto the borrowing costs of everyone.

That being said, there should be some obligation on the part of the lender to do some diligence before loaning money to clearly insolvant borrowers. I know practically nothing about municipal finance, but we can assume that the bonds issued by Stockton were rated before being sold. What was the rating on those bonds? And if they were rated AAA or something similar isn't there some obligation on the part of the rating company to look into the financial situation of the borrower before rating the bonds?

What is also relevant is the relative rarity of bond defaults prior to what's happening in California. That rarity may have led to high bond ratings - no one thought it even possible that a city with the power to tax could go bankrupt. But with the California bankruptcies lenders are going to take a harder look everywhere before loaning money to government. That in itself is bad for government since it will likely mean borrowing costs go up all over. Thanks Caifornia!

Governmental bond defaults used to be unthinkable in the United States, but the combination of corrupt Democratic governments in league with government created unions has led to what we have today. Let's call it what it is - the unoins bribe government officials with campaign donations, and get unreasonable benefits in return. The voters are systematically bought off, lied to and are kept in the dark about what's going on. The result: Stockton and a thousand other places where corrupt bargains exist between Democratic officals and Democratic created government unions. It's a situation that has grave consequences for society since what's going on is ultimately destructive of that society.

We could also ask: "where was and is the media on this?" Where are the "60 Minutes" or "Frontline" stories, the N.Y. Times or WAPO, or L.A. Times investigative articles on the corrupt relationship of party and union? The answer is "nowhere" - the idea of any of the Democratic media saying a thing about this is laughable - given the close relationship between the Democratic Party and the Democratic media, including the foregoing entities, as well as the traditional networks, you won't see a word written or spoken about this issue that the least bit critical. Especially since, as shown by the last election, many of the people who work for Democratic media entities also take time off to work for the Democratic Party as well.
When you come right down to it, there is little difference beween media and party but that a completey different subject.

What is really different is this - bad government used to lead to a change in government. That is no longer true - to give an extreme example, did the Republicans take over Detroit as the Democrats were destroying the city? Same with California - the state is systemically destroying itself, all as a result of bad government, but the Democrats keep winning elections. And that's the pattern - Democrats get into office, and they stay there, through the use of well honed tools which by now need not be mentioned, until the place becomes, as in Detroit, Stockton etc. unlivable. But, even in extremis, the Democrats stay - such is the combination of media control and entrenched power.

There will be more Stocktons, but the answer will likely be that lenders will need to wise up, and watch their money more carefully. There is a chance that the state may step in, since if the lenders go down in Stockton they will make bonds less attractive everywhere, but based on the Democratic record of fiddling while Rome burns don't count on it.
There's nothing unfair about it. Here is a good link from Huffington Post on the spending spree: The city spent money like crazy on dubious projects -- note the downtown redevelopment nonsense, the ridiculously generous lifetime medical benefit and the most-generous-possible retirement benefit for cops and fire. Other cities have done just fine recruiting cops without giving them millionaires' pensions. City Manager Deis has done a good job detailing some of the city's profligate ways -- indeed, current officials have spent much time blaming past officials. Other cities have faced the foreclosure situation too. But like any irresponsible person, it's easy to blame those damn credit card companies or anyone else or external forces for problems of their own making.
Michael Fitzgerald January 04, 2013 at 2:58 PM
The comparison between a city and a free-spending person is unfair. A free-spending person has only himself to blame. The city was fiscally devastated by the foreclosure crisis -- which, incidentally, was caused in large part by Wall Street. A city also has statutory obligations to protect its citizens' safety. A city with a violent crime rate in the top 10 nationwide cannot cut its police force to the point of anarchy. On top of that, it must, by law, balance its budgets every year. If the funding of its core functions is going to debt, the debt must be restructured. All of these factors are omitted from Mr. Greenhut's invidious analogy -- revealing the differeence between moralizing in one's study and making difficult moral choices in the real world.
Democratic Hustler Politicians + Corrupt Greedy Unions = BANKRUPTCY BABY!
I am very concerned about the moral implications of government debt. While an individual or family might operate in hock for a while, they have an overall plan to get out of it in a few years. Government budgeting doesn't really recognize any time period longer than a year and shorter than never.

The Baby Boom generation's parents used government debt to modernize the government's relationship to the economy in the New Deal and then to fight WWII. For some reason, government ran up even more debt during the Boomer's prime earning years, and is now facing crisis as they transition to retirement. There's definitely a moral deficit associated with how large the debt is today, but I don't know to whom its liability should be attached.
Democratic Hustler Politicians + Corrupt Greedy Unions = BANKRUPTCY BABY!
Chris Mahoney's point is a good one. The results here likely will be driven by the language of the indenture and their application by the bankruptcy court.

I am struck, however, by a point the author doesn't address. Let's assume the worst for the bondholders, and that the bondholders end up taking a severe haircut to protect the benefits and pensions of public workers in Stockton. Yes, there has been some dumb money thrown at Stockton, but what financier in their right mind would ever loan money to Stockton under any circumstances again? And can a troubled city with a greatly diminished revenue base truly live without any means to obtain credit or financing? The city may protect its workers for a little while, but isn't this dodge in bankruptcy an invitation to true economic devastation? Or is that strategy to make things so bad the state or the feds can be encouraged to pitch in?
The supposed mass exudous of police officers is quite humorous. Where are they going? What city is going to offer them higher wages and benefits?
As goes California, so goes the rest of the country -- except that it will be worse in CA, since unlike the Federal Government, it can't print money.

Most people truly have no clue how much trouble the country is in. Both California and the US are broke -- it's really that simple. Total debt and unfunded liabilities exceed the total net worth of the entire US population -- rich, poor and in-between.

Maybe people will see what happens in CA and realize they need to make significant changes to enable the country to live within its means -- which will necessarily require significant reductions in expenses. Tax increases alone simply won't solve the problem, the numbers don't work.

And Obama is on track to make things a whole lot worse. Prepare accordingly.
Presumably a court can read the bond indenture and determine what if any valid claim the bondholders have. I did not see the magic words "general obligation", so I don't know where these bonds stand. Bond investors (and their guarantors) must discriminate between GO, revenue and other types of municipal obligation. My understanding is that a GO has a first lien on tax revenue before any other claimant. If these are GOs, then what's the problem. If they're not, what are the enumerated remedies? All of these questions should have been settled in the indenture.
Great article on an extremely painful subject. I have a question that perhaps you can answer: These unaffordable public-employee pension benefits, are all public employees vested equitably, or do a select handful of connected insiders get most of the benefits while the rank-and-file get crumbs?