Editorial: Bond Defaults Rocking California—Beware of Government Investments by Stephen Frank

Editorial: Bond Defaults Rocking California—Beware of Government Investments by Stephen Frank

Stephen Frank, Editorial for the California Political News and Views, 7/25/12

Stockton has made it clear—they will not pay when payments for bonds come due. They defaulted on the bonds for parking lots—and Well Fargo took them over.

Then Stockton defaulted on the bonds for the new city hall—and Wells Fargo took it over.

Now, Stockton has announced that they will “probably” default on $197 million worth of pension obligation bonds. They could not pay for their pension obligations, so they issued bonds and used the proceeds to pay for the mandated contribution. That is like getting a new credit card to pay off the old one. You just add debt and slow down the inevitable.

Can you take over a pension if Stockton refuses to pay for the bond?

When Barack Obama stole General Motors, what did he do? He took all the equity of the stockholders and made it worthless. Then he forced GM to default on their bonds. That means the bond holders had worthless pieces of paper in their portfolio’s.

At that point, he turned over General Motors to the government and to the unions, the very organizations that killed the auto maker.

Thanks to Moodys we know that if CalPRS is not to go deeper into unfunded liabilities territory cities and counties in California will have to come up with $13 billion this year. That is not possible; it would cause numerous cities to file for bankruptcy. Indeed Los Angeles and San Francisco already pay 23% of their tax revenues for pensions.

As cities pay more for pensions, they have less for public safety, libraries and parks. Basic services are being cut, just to pay for the pension.

How did it get this bad? Easy, it was a self serving cycle of conflict of interest and greed. General Motors went under because the unions demanded and received sweetheart contracts. Management did not want a strike, so they gave in to demands that over 30 years bankrupted the firm. They should have allowed a strike, fire the workers who would not work and hire people who worked for the company, not the union.

In the case of government, once government workers were forced to pay bribes in order to work, the rest was obvious. Unions took money from workers (bribes in order to work) and turned around and used that money to elect friendly council members, members of Board of Supervisors and legislators. How much? In a recent lawsuit, the SEIU had to admit that 46 cents out of every dollar of bribes went to political action.

Once a union owned candidate is elected, they then get to “negotiate” with the people who paid to get them in office. No one is at the table representing the families.

One solution would be to force the elected official to recuse themselves if they took union money for office.

The better answer is to allow workers the freedom to work, without having to pay money to the Rotary, PTA or the unions. Only when the workers are free can the cities act based on economics, not payback.

Over the next few weeks cities are going to be cutting spending and employment. Watch cities announcing they will not pay for pension obligation bonds already issued.

The good news is that this will slow down or stop the issuance of such bonds. It is obvious that government pension systems are insolvent. That includes the UC system program unfunded liability of over $21 billion and the Los Angeles Department of Water and Power liability of $11 billion.

I hope investors look at Moodys report and the Fitch downgrading of several cities to stop feeding the addicts. In the end investors will lose—how do you repossess a pension?

A friend of mine just bought close to 200 sports cards on EBay—as an investment. Maybe that is better than buying government bonds, especially pension or tax obligation bonds.

As the ad says, ”It is your money.” Be careful with it.