How a Plan to Help Stockton, Calif., Pay Pensions Backfired

The following is an excerpt from an article in 

The New York Times
Tuesday, September 04, 2012

How a Plan to Help Stockton, Calif., Pay Pensions Backfired

By MARY WILLIAMS WALSH

Jeffrey A. Michael, a finance professor in Stockton, Calif., took a hard look at his city’s bankruptcy this summer and thought he saw a smoking gun: a dubious bond deal that bankers had pushed on Stockton just as the local economy was starting to tank in the spring of 2007, he said.

Stockton sold the bonds, about $125 million worth, to obtain cash to close a shortfall in its pension plans for current and retired city workers. The strategy backfired, which is part of the reason the city is now in Chapter 9 bankruptcy. Stockton is trying to walk away from the so-called pension obligation bonds and to renegotiate other debts.

After reviewing an analysis of the bond deal, underwritten by the ill-fated investment bank, Lehman Brothers, and watching a recording of the Stockton City Council meeting where Lehman bankers pitched the deal, Mr. Michael concluded that “Stockton is entitled to some relief, due to deceptive and misleading sales practices that understated the risk.”

“Lehman Brothers just didn’t disclose all the risks of the transaction,” he said. “Their product didn’t work, in the same way as if they had built a marina for the city and then the marina collapsed.”

Financial analysts and actuaries say essentially the same pitch that swayed Stockton has been made thousands of times to local governments all over the country — and that many of them were drawn into deals that have since cost them dearly.

Since virtually all pension obligation bonds turn on the same basic strategy that Stockton followed, Mr. Michael’s research could be a road map for avoiding more such problems, or perhaps for seeking redress. His analysis was part of his August economic forecast for the region, which he prepares as director of the Business Forecasting Center at the University of the Pacific.

There are about $64 billion in pension obligation bonds outstanding, and even though issuance has slowed, more of the bonds are coming to market, even now.

Officials in Fort Lauderdale, Fla., are scheduled to vote on a $300 million pension obligation bond on Wednesday, for instance. Hamden, Conn., has amended its charter to allow for the bonds to rescue a city pension fund that is wasting away. Oakland, Calif., recently issued about $211 million of the bonds, following the lead of several other California cities and counties.

For more, visit www.nytimes.com.

401(k) Woes When a Company Goes Bankrupt — Fair Game

The following is an excerpt from an article in 

The New York Times
Sunday, August 26, 2012

401(k) Woes When a Company Goes Bankrupt — Fair Game

By GRETCHEN MORGENSON EVERYONE with a 401(k) knows that bad investments and high fees can threaten their retirement. But what if the company that sponsors your plan goes bankrupt?

As the employees of one small company have learned, it can wreak financial havoc. They’ve gone nearly four years without access to their retirement savings.

It isn’t supposed to be this way. When a company collapses, the assets of its 401(k) are to be transferred to account holders — promptly.

But that’s not what happened at Penn Specialty Chemicals in Memphis. In July 2008, the company sold most of its assets to a French chemicals concern. Its employees — there were fewer than 100 — were given the choice of shifting their retirement plans to the acquirer or keeping them with Vanguard, the fund giant that is the record keeper of Penn Specialty’s 401(k). Many people in the plan, especially those close to retirement, chose the path of least resistance: they stayed with Vanguard.

Then, that December, Penn Specialty filed for Chapter 7 bankruptcy — liquidation. The court appointed George L. Miller, a certified public accountant at Miller Coffey Tate in Philadelphia, as trustee. In these cases, the trustee must advise the Internal Revenue Service why the 401(k) was terminated and await I.R.S. approval that the plan had not run afoul of tax laws.

Such a determination should have been relatively simple in Penn Specialty’s case because, as the I.R.S. manual says, bankruptcy is usually sufficient evidence to support a plan’s termination. In such a circumstance, the I.R.S. says, participants should receive their share of the plan’s assets “as soon as administratively feasible,” or within one year.

The people with 401(k)’s at Penn Specialty haven’t even come close. Although they can switch among various Vanguard funds, they can’t touch their money. While they wait, they’ve had to pay high administrative fees on their accounts. Older account holders could become subject to substantial tax penalties because they can’t take distributions, as required by law. Inability to gain access to their funds has put some of the company’s retirees under significant financial strain.

For more, visit www.nytimes.com.

The Bankruptcy Cliff

Excerpt from the The New York Times
Sunday, February 19, 2012

Jefferson County, Ala., Falls Off the Bankruptcy Cliff


By MARY WILLIAMS WALSH

ONE county jail here is so crowded that some inmates sleep on the floor, while the other county jail, a few miles down the road, sits empty.

There is no money for the second one anymore.

The county roads here need paving, and the tax collector needs help.

There is no money for them, either.

There is no money for a lot of things around here, not since Jefferson County, population 658,000, went bankrupt last fall. There is no money for holiday D.U.I. checkpoints, litter patrols or overtime pay at the courthouse. None for crews to pull weeds or pick up road kill — not even when, as happened recently, an unlucky cow was hit near the town of Wylam.

“We don’t do that any more,” E. Wayne Sullivan, director of the roads and transportation department, said of such roadside cleanup.

This is life today in Jefferson County — Bankrupt, U.S.A. For all the talk in Washington about taxes and deficits, here is a place where government finances, and government itself, have simply broken down. The county, which includes the city of Birmingham, is drowning under $4 billion in debt, the legacy of a big sewer project and corrupt financial dealings that sent 17 people to prison.

If you want to take a broad view, the trouble really began with the Constitutional Convention of the State of Alabama in 1901. The document that emerged there — written to empower business interests and disenfranchise African-Americans and poor whites — gives towns and counties little authority over local issues. Local taxing power rests with the state, though state lawmakers are loath to wield it today, in an age of anti-tax populism. Last summer, the Supreme Court of Alabama struck down a tax that was a crucial source of revenue for Jefferson County, finally pushing the county over the brink.

Officials here have only begun to grapple with the implications of life under Chapter 9 of the federal bankruptcy code, a municipal form of debt adjustment, rather than reorganization or liquidation. Until now, the most famous example was Orange County, Calif., which filed for Chapter 9 in 1994, after risky investments went horribly wrong. Many local governments are struggling to pay their bills these days, but hardly any have filed for bankruptcy. Notable exceptions include Harrisburg, the capital of Pennsylvania, Vallejo, Calif., and Central Falls, R.I.

Let Greece Go Bankrupt: Jim Rogers

"Let Greece go bankrupt, let all the people who are bankrupt go bankrupt, and then you can start over.  You reorganize the assets and start over," Jim Rogers, CEO of Rogers Holding told CNBC. "Until that happens, this is going to be an on-going discussion," he said.  To see a video of this and other thoughts, click the link below:

http://video.cnbc.com/gallery/?video=3000073700