CalPERS Refutes Judgement to Let Stockton Walk Away

The largest pension fund in the US has said a decision to let the city of Stockton walk away from its pension obligations—and the fund completely—is not legally binding.

The California Public Employees’ Retirement System (CalPERS) issued the statement yesterday evening, following the declaration by a bankruptcy judge that the city of Stockton had the right to reduce pension payments and even sever ties with the $300 billion fund.

“We disagree with the judge’s opinion on the issue of pension impairment,” CalPERS’ statement said. “This ruling is not legally binding on any of the parties in the Stockton case or as precedent in any other bankruptcy proceeding and is unnecessary to the decision on confirmation of the City of Stockton’s plan of adjustment.”

Stockton had argued that it must make its pension contributions for public employees before its creditors are paid the entire amount they are owned, local newspaper, the Sacremento Bee reported.

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However, the judge said: “California public employee retirement law… is simply invalid in the face of the supremacy clause of the United States Constitution.”

The verbal ruling came after more than two years of legal wrangling, during which time CalPERS submitted $147.5 million in unsecured claims to city assets, according to court documents. The pension fund holds the single largest claim to Stockton’s remaining assets and future cash flow.

A major player in the latest stages has been investment manager Franklin Templeton. The fund manager claimed it was owed $36 million from the city, but had been promised just $4 million in repayments, which amounts to 12 cents in the dollar, whereas other creditors had been offered up to 50 cents.

The Sacremento Bee reported the firm’s lawyer as defending his clients’ stance, saying CalPERS had been seeking “exalted status under California law”.

Franklin Templeton told CIO that it was pursuing a settlement that would “address all Stockton’s liabilities”.

“The evidence establishes that Stockton can pay substantial amounts to Franklin even if it leaves the pensions untouched,” the firm said. “Had Stockton chosen to do so, it could have emerged from bankruptcy long ago, avoiding the delay and expense of litigation. Instead, Stockton ignored that evidence and proposed just a small, one-time payment to us. As a result, we had no choice but to resist confirmation in order to stand up for the individuals who have entrusted us with their savings.”

The fund manager said it continued “to desire a cooperative partnership with Stockton” and was “hopeful that the Bankruptcy Court’s decision will prompt Stockton to offer a more realistic plan that provides a fair and equitable recovery for our stakeholders, as required by the Bankruptcy Code.”

The judge is to make a written statement at the end of the month.

In May, CalPERS waded into the Detroit bankruptcy hearing, saying the judgement could open the floodgates and allow municipalities all around the US to step back from their obligations or impair pension benefits.

The pension fund concluded its statement on the Stockton verdict: “CalPERS will reserve any further comment until such time as the court renders its final written decision. What’s important to keep in mind is what the City of Stockton stated in court today: that they can’t function as a city if their pensions are impaired.”

billgrosspimco2 Former PIMCO CIO Bill Gross, now of Janus Capital.Moody’s has put a price on the departure of PIMCO’s “bond king” for parent company Allianz.

PIMCO’s owner is likely to lose hundreds of millions of euros in revenue, according to rating agency Moody’s, as investor sentiment turning away from fixed income has combined with founder Bill Gross’ exit to create a perfect storm.

In its latest credit outlook, the agency set out three possible scenarios for Allianz in the aftermath of a draining September.

“We expect the departure of the star manager to result in higher outflows at PIMCO and lower profits at Allianz SE, a credit negative,” the report said.

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To set out its three scenarios, Moody’s used UK equities manager Neil Woodford’s departure from Invesco last year as a base for its projections. Woodford’s departure sparked outflows of 10% from his former employer, amounting to $4.8 billion.

Already PIMCO’s losses dwarf that figure, although Gross’ flagship fund is still the world’s largest, and is multiple times larger than Woodford’s.

PIMCO’s Total Return Fund saw outflows of a record $23.5 billion in September, the company admitted yesterday. “Of note, the largest daily outflow occurred on the day of Bill Gross’s resignation from the firm, while outflows on the two following days were considerably smaller,” it said.

This contributed to the $42 billion the firm as a whole had seen pulled out by investors in the first half of the year, totaling more than $65 billion in 2014 so far.

According to Moody’s calculations, outflows of $91 billion would constitute a 5% drop across the year. It would pull down total Allianz assets to $1.72 trillion by the end of 2014 and reduce net income to the parent company by 6.35% to €5.9 billion ($7.3 billion).

A 10% outflow—like that seen at Invesco—would pull assets down by $181 billion and reduce net annual income to €5.8 billion. A 15% outflow would see $272 billion run out of the door and cut net annual income by more than 9% to €5.7 billion.

“PIMCO has some ability to reduce costs, but overall we expect Allianz SE’s asset management segment to generate lower profits as a result of this development,” said Moody’s. “Lower profits will reduce Allianz SE’s debt service capacity, as measured by its earnings coverage ratio.”

Allianz’s Frankfurt-listed shares tumbled 4.8% on the news of Gross’ departure—from €136.38 on Thursday’s close to €129.9 on Friday. At the end of trading yesterday it was down 6.8% on Thursday’s figure at €127.12.

In contrast, Janus Capital—Gross’ new employer—saw its stock rocket, from $11 a share on Thursday’s close to $15.9 at its highest point on Friday—an increase of 43.5%. Yesterday, it closed slightly down, at $14.40.

Regarding Gross’ departure from PIMCO, Moody’s said that although the move was significant—asset management is Allianz’s second-largest income generator—the company was not “overly reliant” on PIMCO’s revenues.

This morning, PIMCO’s global CIO for fixed income Andrew Balls told the UK’s BBC Radio Four that Gross had been stepping back from day-to-day management for about a year and the Total Return Fund’s process had not changed.