More Risks Ahead for Muni Investors


Stockton, California, the most recent U.S. city to file for Chapter 9 bankruptcy protection, has presented serious issues about whether municipal bondholders will be forced to take a “haircut” while Stockton pensioners do not. With 300,000 residents, Stockton is the largest U.S. city in history to file bankruptcy.  Stockton has total outstanding debt of over $500 million.

Stockton, like most California cities, pays into the California Public Employees’ Retirement System (“CalPERS”).  Stockton reportedly pays CalPERS about $30 million per year.  Approximately 40% of Stockton’s outstanding liabilities are to CalPERS, making CalPERS the Stockton’s largest creditor, according to an InvestmentNews article by Jeff Benjamin entitled “Stockton ‘cram-down’ would severely test muni market.”

The municipal bond market sees overly generous pay and benefits as a contributing factor in Stockton’s financial disaster, and is insisting that CalPERS (and Stockton pensioners) not be made whole at their expense. Yet, according to Stockton officials, spreading the pain to CalPERS is “off the table.”  Apparently, Stockton did not even list CalPERS as a creditor in its bankruptcy filing.

Municipal bonds are supposed to be senior to other debt obligations in the event of a default.  If CalPERS pensioners are given priority over municipal bondholders, that is likely to lead to repercussions not only for Stockton, in terms of its ability to issue debt in the future, and its ultimate survival, but the entire $4 trillion municipal bond market as well.

So far, however, Stockton has shown no interest in renegotiating its obligation to CalPERS, and that does not bode well for the municipal bondholders (“Stockton bankruptcy sends chilly message to muni bondholders,” by Jeff Benjamin, InvestmentNews).  As the article notes, it is a time for municipal bond investors to pay attention.

Page Perry is an Atlanta-based law firm with over 150 years of collective experience maintaining integrity in the investment markets and protecting investor rights.