Shouldn't bankrupt Stockton CA pay bondholders first?

I think the bondholders should be treated like any other creditor and paid the same as any other secured creditor. If they get 50 cents on a dollar the bondholders get 50 cents. The bonds were probably paying a high interest rate and that attracted greedy investors. Well they should have done their homework and looked at the credit rating or the financials if they were available.

Greedy investors?

@josie I’m guessing they were some of the highest yielding bonds. But investors don’t always look at the fundamentals. They see that high rate and they grab the bonds.

I don’t know if I’d say “first,” but I see no reason why the bondholders shouldn’t get their principal back as part of any bankruptcy proceeding that Stockton undergoes. It seems to me quite literally the least that Stockton owes them. The bondholders knew they were taking a risk in purchasing the bonds, of course, but the city also knew they were taking on various obligations in selling them. Bankruptcy gets them out of some of those obligations, but surely not all of them. As for paying into the pension program, that is required by California state law. Only a federal court could remove that responsibility.

@Adirondackwannabe I’m inclined to agree with @josie that we shouldn’t jump to calling the investors in question “greedy.” Municipal bonds carry risks like any other investment, but they are generally considered to be rather safe. By population, Stockton is the largest city in San Joaquin County, the 13th largest city in California, and the 65th largest city in the United States. It is also the largest city to ever file for protection under Chapter 9 of the US Bankruptcy code, which is why the decision has taken so many by surprise. This suggests that there is every reason for investors of all sorts to buy these bonds, and I expect that they defy classification with regard to their avarice when considered as a group.

@SavoirFaire Okay, I’ll take back the greedy investor crack. We’ve grown complacent with municipal bonds. We assume they’re all safe.

It is California law that they pay pension obligations first. I don’t understand why this is an issue, other than you don’t like unions.

And liquidations actually work very differently then as described: Assets are sold, employees are paid, taxes are paid, administrative expenses, outstanding bills, then you look at each level of bond debt based on seniority, and if there is money to pay at a level of seniority you pay each in turn.

I am unaware that bondholders get back anything other than a pro-rata share of remaining assets in most cases. Are you aware of a bankruptcy where they have gotten a sizable portion of their principal back? I am really asking, I don’t know of any.

@Imadethisupwithnoforethought Only Chapter 7 filings are liquidations, so we shouldn’t expect a Chapter 9 reorganization like Stockton’s to proceed like a Chapter 7 liquidation. That said, I don’t know of any reorganization in which investors received their full principal back. Given that the city isn’t going away, however, I don’t see why it is unreasonable to think that it should have to repay at least that. I would also extend that principal to Chapter 11 bankruptcies. What should be the case and what the law requires, however, are not always one and the same.

@SavoirFaire Agreed, 9 is different, but I don’t agree that they should have to pay bonds before pensions. Outstanding pension projections are likely available to the public, and part of the risk to buying Munis. Moreover, thinking in moral terms, I am less worried about the financial futures of investors who are buying tax advantaged income products than the financial futures of civil servants, and the children of Stockton who want to continue going to school.

@Imadethisupwithnoforethought I agree with you on the pensions, and noted earlier—as you also did—that there is good reason in this case for Stockton continuing to pay into the pension funds. Indeed, the bit about pensions in the OP strikes me as a red herring; and given your first response, I take it you agree. I also said that I don’t think the bondholders should be paid back first, if there must be a temporal ordering.

That said, I will reiterate that we should be careful of assuming that “investors who are buying tax advantaged income products” and “civil servants” refer to mutually exclusive groups. Several members of my family have been big believers in bonds, considering them to be investments that were both safe and patriotic. This group includes a teacher, a public utility worker, a federal employee, and a private business owner (among others).

Noted. I forget sometimes people purchase things without a lot of detailed knowledge.