Recently, Dan Walters wrote about the Stockton bankruptcy issue (“Judge seeks final word on pension,” July 14, Page A5), detailing that Judge Christopher Klein invited parties to “straighten me out before I make some dramatic boneheaded mistake.” The judge seems about to do just that. That mistake was made in Detroit, where a judge declared pension obligations fair game in bankruptcy proceedings.
It’s a rare investment that doesn’t include risk language. A bond prospectus states principal can be lost. That’s the distinction between bondholders in Detroit, San Bernardino and Stockton, and pensioners who got no prospectus about risk.
Bond investors seek rates commensurate with risk – higher risk, higher interest rate. Thus, junk bonds carry higher returns. Municipal bonds are likewise risk-rated. Detroit, surely, had to pay bondholders higher rates. If conditions change, investors can sell their bonds. If city employees had received disclosure about pension contract abrogation, some might have sought other employment or negotiated higher compensation.
Investments have gone bad, but pensions haven’t been impaired. So, without disclosure, no employee could have anticipated a loss.
As to the notion that all contracts should be treated equally, ask a student about discharging student loans under bankruptcy. If legislatures have the authority to preclude that remedy, they could also preclude impairment of pension contracts.
Rick Mogg, Sonora