Setting up an epic showdown over public employee pensions, two bond firms have formally protested Stockton's bankruptcy and the millions the city pays CalPERS for retirements.
The two firms insured bonds issued by Stockton during the real estate boom; they now stand to lose heavily because of the city's financial meltdown.
In protests filed this week in U.S. Bankruptcy Court in Sacramento, the companies challenged the legitimacy of Stockton's bankruptcy filing. They pointedly complained that they're about to get clobbered in the bankruptcy, while the city continues to spend millions on its CalPERS obligations.
The city's bankruptcy plan "targeted its bondholders and left CalPERS and serious labor concessions off the negotiating table," said Assured Guaranty Corp. in papers filed Thursday.
The Bermuda company would lose $103 million under Stockton's debt restructuring proposal. Assured Guaranty indicated last week it would go to court to fight the flow of dollars from Stockton to CalPERS.
The filings by Assured and a New York company, National Public Finance Guarantee Corp., increased the likelihood that Stockton's bankruptcy will become a battleground over validity of retirement promises made to government employees.
Until now, public pensions have been generally considered sacred. Once someone goes to work in government, their pensions are off limits. CalPERS has vowed to fight any attempts to tamper with those promises, in Stockton and elsewhere.
But challenges are starting to emerge as struggling governments look to cut costs. State legislatures reduced cost-of-living increases for retirees in Colorado, Minnesota and South Dakota. Retired police and firefighters in a bankrupt Rhode Island city accepted a 25 percent cut in their pensions last fall.
National Public Finance, in its protest, said Stockton hasn't even tried to come to grips with its pension costs which the company says are at the heart of the city's financial distress.
Stockton pays the California Public Employees' Retirement System around $29 million a year, according to the pension fund.
"Rather than face the hard realities imposed by its unbearable liability to CalPERS, the city takes a pass," the company complained in its protest.
National Public guaranteed $88 million worth of bonds, according to city records. The city's plan would cost the company at least $31 million.
CalPERS indicated it would fight the bond firms' efforts to take down pension benefits.
"We remain committed to safeguarding the constitutionally protected pension benefits of the city's employees and retirees, many of whom have spent their entire careers in public service," CalPERS said in a press statement.
City spokeswoman Connie Cochran wouldn't comment on the bond firms' protests but said Stockton has made "heart-wrenching" cuts to city services already.