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Stockton - impact on munis ?
Old 04-02-2013, 03:50 AM   #1
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Stockton - impact on munis ?

"A federal bankruptcy judge ruled on Monday that the city of Stockton, Calif., was eligible for court protection from its creditors, clearing the way for a battle over whether public workers’ pensions can be cut when the city they work for goes bankrupt.

Stockton, Calif., has cut tens of millions of dollars in city services.
After declaring Chapter 9 bankruptcy last year, Stockton eliminated tens of millions of dollars in city services and said it would cut some bond payments in a way unseen before in municipal bankruptcy. But bondholders objected to Stockton’s effort to protect pensions while forcing losses on investors."


http://www.nytimes.com/2013/04/02/bu...qDDkMIQAewShKQ
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Old 04-02-2013, 06:20 AM   #2
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What do you think?
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Old 04-02-2013, 06:24 AM   #3
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Well some of my investments are in munis and I confess I am getting a bit nervous. Not sure if I should sell them or not. Would like to read others' opinions also.
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Old 04-02-2013, 06:32 AM   #4
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I see. Stockton bankrupcy is old news. The city was broke long before it became insolvent, and any muni manager with Stockton bonds in his / her portfolio should be fired. This case will be in the courts for a while yet while the two main constituents (pension holders vs investors) battle each other to see who pays.

I have lots of munis in my portfolio and am sleeping well.
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Old 04-02-2013, 06:37 AM   #5
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It has been a stressful couple of weeks because I also have assets in Europe. After what happened in Cyprus, I am in the process of breaking up accounts and spreading assets among more banks and accounts to remain under the 100k limit in euros. Not sleeping well here but fortunate to be able to discuss these matters on this website.
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I see. Stockton bankrupcy is old news. The city was broke long before it became insolvent, and any muni manager with Stockton bonds in his / her portfolio should be fired. This case will be in the courts for a while yet while the two main constituents (pension holders vs investors) battle each other to see who pays.

I have lots of munis in my portfolio and am sleeping well.
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Old 04-02-2013, 06:41 AM   #6
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Some states and cities' finances are on shaky grounds. An article in the Sacramento Bee a couple of days ago reported the result of the audit by the Bureau of State Audits of California that showed the State has a negative net worth of 127 billions dollars. The audit listed the state's long-term obligations at $167.9 billion, nearly half of which ($79.9 billion) were in general obligation bonds, with another $30.8 billion in revenue bonds. And that debt did not include unfunded liabilities for state employees' future pensions, nor the $60-plus billion in unfunded liabilities for retiree health care.

Bonds already carry substantial risk of losing net asset values if interest rate rises, and the shaky finance of some states and cities impose an additional risk of default . I would stay away from public debts in those particular cities and states, but of course there are states and cities that are better run and are on much more solid grounds.
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Old 04-02-2013, 06:49 AM   #7
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It has been a stressful couple of weeks because I also have assets in Europe. After what happened in Cyprus, I am in the process of breaking up accounts and spreading assets among more banks and accounts to remain under the 100k limit in euros. Not sleeping well here but fortunate to be able to discuss these matters on this website.
Well, if your portfolio is mostly in fixed income and savings, it makes sense to keep that money safe. Not sure how your munis are invested - individual bonds or mutual funds. In this case funds are safer if you stick with reliable managers at Vanguard or equivalent. While some states and cities do not have good financial practices, the finances of the bigger issuers are well known and prices mostly reflect this.
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Old 04-02-2013, 07:02 AM   #8
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I agree a mutual fund with professional management and risk spreading is the way to go if you want to stay in muni bonds. But Stockton's problem was known since last year, so some of the risks had already been priced in.

Good luck.
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Old 04-02-2013, 08:50 AM   #9
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But, the bigger issue here is how pensions and other benefits for retirees will change. Cities and States have the same issues with their retirees' expenses as many corporations have.

There are issues to resolve for current retirees, "imminent" retirees, and the "next generation" of retirees. While companies and municipalities are figuring out what to do about the first 2 groups (near and dear to my heart, anyway), they're changing the rules for the next batch of employees coming through.

I don't think the "next generation" will get anywhere near the same kinds of benies that ours got. I fear what's worse - IMHO - is that many in this generation will not get the deal that we thought we were going to get, that we worked our whole lives to earn.
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Old 04-02-2013, 08:57 AM   #10
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Felix: it is a reality now. Many pensions have been yanked at the last minute for retirees. I have a friend at IBM who went through that transition there. IBM converted plans, and some employees were not happy with the buy out number as they got away from defined benefit. New employees don't get the same plan that those who started 30 years ago got.

States and municipalities can't keep giving out health care for life if you work there a day. It just doesn't scale. Even in retirement, it behooves states to share the cost with employees. I have friends from my state who have no idea the gold mine they have after working just 10 years due to the health insurance vesting. When we discuss what I'll pay, they think it is a joke.

It is no joke.

----

To follow up on the OP. I have munis in a Vanguard Fund and am not in panic mode. There will be some losses, but there are still a lot of quality munis out there.

If I were buying individual munis, I'd avoid anything from California or Illinois just for starters. Then proceed very carefully from there.
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Old 04-02-2013, 11:44 AM   #11
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I took the capital gains on the individual muni's in my portfolio (held since 2008) in November 2012 to take advantage of 15% tax rate. Funds were reinvested in higher yielding AAA and AAAA corporates with average maturity of 3 years. I retired in September 2012 so this will be my first year without salary income. My effective tax rate will be much lower without salary (I won't draw my corporate pension until I hit 65) so the interest on the corporates after tax is better than the munis would have been this year. This move substantially increased my yield to maturity even after paying capital gains tax.
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Old 04-02-2013, 12:00 PM   #12
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Not worried. Stockton has been in trouble for a long time, no surprise there. And then there is this recent article by Larry Swedroe:

Municipal bonds are looking better and better - CBS News


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In summary, the atypical, higher than Treasury yields have made municipal bonds attractive alternatives for taxable investors, even those not necessarily in the highest tax brackets. So, if you have avoided municipal bonds because you thought your lower tax bracket status made them unattractive, it's time to take another look and do the math. And if you've been scared off by dire forecasts of municipal defaults, it's also time to reconsider.
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Old 04-02-2013, 01:13 PM   #13
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Originally Posted by obgyn65 View Post
Well some of my investments are in munis and I confess I am getting a bit nervous. Not sure if I should sell them or not. Would like to read others' opinions also.
Are these individual munis?

Seems it would take a great deal of research to understand the risk/reward for an individual issue. One could just trust the ratings agencies I guess, but then one still needs to determine if they are sufficiently diversified.

I guess I'll 'answer' the question with another question: If you are looking to sell now, what went into your decision to buy earlier?

I think the answer is in there. Did the issues you bought fundamentally change, or are they isolated from this 'Stockton Effect'? If they have not changed, why sell? And if they did, what does that say about your (or anyone's) ability to purchase low-risk investments? Things change over time - it's only been a few years since you bought these, but you have decades of retirement ahead of you. Can you see decades in advance?

There's not much ability to hide from risk. But diversifying (like a mutual fund) can help spread that risk. You can pay someone to take that risk for you (like an annuity), but can they deliver 30 years from now, or will they be like Stockton? Who can know? Would anyone have expected GM bondholders to take a bath 30 years ago? Those annuity companies do not have a silver bullet - about the best they can do is just pay a low overall return and hope that they can beat that with conservative investments.

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Old 04-02-2013, 03:50 PM   #14
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I see. Stockton bankrupcy is old news. The city was broke long before it became insolvent, and any muni manager with Stockton bonds in his / her portfolio should be fired.
+1

This reminds me of the organizations that still held sovereign Greek bonds months after the Greek bailout became a 'when' not an 'if'.
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Old 04-02-2013, 03:51 PM   #15
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I am not a legal person, but I thought that in bankruptcy cases, employee earnings were ahead of creditors when deciding who gets paid first. (Please correct me if I am wrong.) I consider the pension as part of the earnings since they were earned through the labor of the employees. Changing this would be as dangerous as doing something like ..... taking money from insured deposits to pay a bank's creditors.

We must be very careful about the precedents we set. Or as my old grandpappy used to say, 'Be careful what you ask for, somebody might give it to you."
Hmmm, when private companies go bust, they routinely reject penson and retiree healthcare liabilities and if the PBGC coverage isn't enough the workers get punked. Why should municipal bankruptcies be any different?
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Old 04-02-2013, 03:57 PM   #16
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I am not a legal person, but I thought that in bankruptcy cases, employee earnings were ahead of creditors when deciding who gets paid first. (Please correct me if I am wrong.) I consider the pension as part of the earnings since they were earned through the labor of the employees. Changing this would be as dangerous as doing something like ..... taking money from insured deposits to pay a bank's creditors.

We must be very careful about the precedents we set. Or as my old grandpappy used to say, 'Be careful what you ask for, somebody might give it to you."

Pension is different than wages... from what I see they are the next level... with limitations...

I wonder where the bonds would land....

This is from a search... I looked a Chp 9, but it sent me back to this list...

10 Priority Claims



In order, with 1 being the highest priority and 10 being the lowest, the priority claims are:
  1. Domestic support obligations, such as alimony or child support
  2. Administrative expenses of the bankruptcy case
  3. Debts incurred after an involuntary petition but before bankruptcy has been declared; when creditors try to force a debtor into bankruptcy by filing an involuntary petition, the courts give priority to entered into after the petition is filed in order to encourage suppliers, contractors, and creditors to keep doing business with the debtor
  4. Employee wages, up to $10,950 per employee
  5. Unpaid contributions to employee benefit plans, with some limitations
  6. Claims for grain from a grain producer or fish from a fisherman, which keeps the cast of Deadliest Catch happy
  7. Consumer layaway deposits of up to $2,425 each
  8. Taxes incurred prior to the bankruptcy petition
  9. Commitments to Federal depository institutions to maintain the institution’s capital
  10. Claims for death or personal injury from DUI/DWI

Edit to add, found the limitations...

(5) Fifth, allowed unsecured claims for contributions to an employee benefit plan—
(A) arising from services rendered within 180 days before the date of the filing of the petition or the date of the cessation of the debtor’s business, whichever occurs first; but only
(B) for each such plan, to the extent of— (i) the number of employees covered by each such plan multiplied by $10,000; less
(ii) the aggregate amount paid to such employees under paragraph (4) of this subsection, plus the aggregate amount paid by the estate on behalf of such employees to any other employee benefit plan.



Which seems to leave out a big chunk of what is owed...
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Old 04-02-2013, 04:15 PM   #17
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Why should municipal bankruptcies be any different?
Politics.
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Old 04-02-2013, 04:25 PM   #18
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Hmmm, when private companies go bust, they routinely reject penson and retiree healthcare liabilities and if the PBGC coverage isn't enough the workers get punked. Why should municipal bankruptcies be any different?
That is what the forthcoming count battle should decide. Yesterday's ruling allows it to go forward.
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Old 04-02-2013, 06:21 PM   #19
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Hmmm, when private companies go bust, they routinely reject penson and retiree healthcare liabilities and if the PBGC coverage isn't enough the workers get punked. Why should municipal bankruptcies be any different?
It's all about power, and public sector unions which are close to the only unions left have tremendous power. And the fact that the people making all the executive decisions often are covered by the same pension plans that would need to be cut to improve municipal finances. The rhetoric and legalistic arguments have nothing to do with logic or fairness, they merely follow the power balance.

Nothing that makes any sense will happen until we have reached a thoroughly dystopic world. Those of us who lived in the 50s should thank our parents for those precious years of less insane politics.

Ha
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Old 04-02-2013, 07:01 PM   #20
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In order, with 1 being the highest priority and 10 being the lowest, the priority claims are:
  1. Domestic support obligations, such as alimony or child support
  2. Administrative expenses of the bankruptcy case
  3. Debts incurred after an involuntary petition but before bankruptcy has been declared; when creditors try to force a debtor into bankruptcy by filing an involuntary petition, the courts give priority to entered into after the petition is filed in order to encourage suppliers, contractors, and creditors to keep doing business with the debtor
  4. Employee wages, up to $10,950 per employee
  5. Unpaid contributions to employee benefit plans, with some limitations
  6. Claims for grain from a grain producer or fish from a fisherman, which keeps the cast of Deadliest Catch happy
  7. Consumer layaway deposits of up to $2,425 each
  8. Taxes incurred prior to the bankruptcy petition
  9. Commitments to Federal depository institutions to maintain the institution’s capital
  10. Claims for death or personal injury from DUI/DWI
Thanks. It's good to get a clearer picture of the direction the law is going.
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