Big news in the world of municipal finance today. A federal bankruptcy court gave the thumbs-up to the City of Stockton, California, to file bankruptcy. Not many local governments have availed themselves of that option, so this is an interesting case to watch.
The big fight is between the city’s bond holders and employee pension funds. The bondholders (primarily institutional investors) want as much of their money back as they can get and are arguing the pain should be shared with the city’s retiree’s pension funds.
I’m not surprised investors are doing whatever they can to minimize their impending haircut. But bonds are simply another investment category. Investment implies risk. Anyone who buys bonds knows there is an implicit default risk and they may not be repaid.
Pension obligations are different. They represent the work and effort of employees over the years and should have an absolute priority over bondholders. I hope the bankruptcy court agrees with that proposition.