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Bondholders who extended roughly $50 million to bankrupt San Bernardino, Calif., are criticizing city leaders who plan to protect money for employee pensions but negotiate cuts on the city's other debts, Dow Jones Daily Bankruptcy Review reported today. In court papers, the Luxembourg bank that represents bondholders said the city's decision to make full payments to the state's employee pension fund "was not guided by any sort of strategic vision." Citing a recent ruling from another bankrupt California city, the bank's lawyers said that San Bernardino leaders need to make pension cut decisions at the same time that they redraw contracts with its police and firefighter unions. Since the city filed for bankruptcy on Aug. 1, 2012, San Bernardino leaders still haven't reached new money-saving union agreements for its police officers and firefighters as part of their effort to cut more than $20 million in labor costs from the city's budget.

Gov. Bruce Rauner (R) took his first step toward curbing the power of unions yesterday by announcing an executive order that would them from requiring all state workers to pay the equivalent of dues, the New York Times reported today. Rauner, who faces a Democratic-controlled legislature with strong ties to labor, took the unilateral step saying that he believed those fees violate the U.S. Constitution. “Forced union dues are a critical cog in the corrupt bargain that is crushing taxpayers,” Rauner said. “An employee who is forced to pay unfair share dues is being forced to fund political activity with which they disagree. That is a clear violation of First Amendment rights — and something that, as governor, I am duty bound to correct.”

Bankruptcy Judge Christopher Klein’s opinion last week confirming the city of Stockton, Calif.’s bankruptcy exit plan is as incisive in its rebuke of the California Public Employees’ Retirement System (CalPERS) as it is instructive about U.S. bankruptcy law, according to an editorial in today’s Wall Street Journal. Stockton declared chapter 9 bankruptcy in 2012, and it has since rewritten labor contracts and asked creditors for writedowns. Yet after being browbeaten by CalPERS, the giant public-pension fund, the city held pensions harmless, according to the editorial. CalPERS argued that the California constitution’s guarantee of contracts shielded pensions from cuts in bankruptcy. The fund also asserted sovereign immunity and police powers as an “arm of the state,” including a lien on municipal assets. Judge Klein upheld Stockton’s bankruptcy plan but not before effectively throwing CalPERS out of court. “It is doubtful that CalPERS even has standing,” he writes. “It does not bear financial risk from reductions by the City in its funding payments because state law requires CalPERS to pass along the reductions to pensioners in the form of reduced pensions.” As the judge explains, “CalPERS has bullied its way about in this case with an iron fist.” Calpers’s arguments are “constitutionally infirm in the face of the exclusive power of Congress to enact uniform laws on the subject of bankruptcy under Article I, Section 8, of the U.S. Constitution—the essence of which laws is the impairment of contracts—and of the Supremacy Clause.”

Wayne County, Mich., in which the formerly bankrupt city of Detroit is located, could face a fiscal crisis as early as August, according county documents released yesterday, Reuters reported. The county's general fund had an annual deficit of about $50 million during the last three years, primarily due to a decline in property tax revenue, an unsustainable defined-benefit pension plan, health care inflation, and budget overruns in the sheriff and prosecutors' offices, according to the documents, which accounting firm Ernst & Young prepared for the county. The projected fiscal year 2015 deficit for Wayne County's general fund is $73 million, according to the Ernst & Young document. The county's defined-benefit pension plan is severely underfunded, the document said, deteriorating from 95 percent funded in 2004 to 45 percent in 2013. It could slide to 39 percent by 2023, the document said. http://www.reuters.com/article/2015/02/05/usa-michigan-waynecounty-idUS…

For further analysis of the looming pension crisis in Ft. Wayne and elsewhere, be sure to register for the ABI Live Webinar “Pension Tension: Dealing with Plans in the Restructuring World” on Feb. 26. http://www.abi.org/events/abi-live-pension-tension#overlay-context=

The Pension Benefit Guaranty Corp. is about to take over Reichhold Inc.’s retirement plan, which covers almost 4,500 current and former workers at the maker of polyester resins, saying that it’s underfunded by $97.4 million, Bloomberg News reported yesterday. A bankruptcy judge in Delaware last month approved the sale of Reichhold’s business, partly in exchange for $46 million in junior secured debt. After the sale is completed this month, the Durham, N.C.-based company won’t have any active operations. In October, the PBGC started the process of terminating the pension plan, whose benefits were frozen in December 2012. Reichhold arranged a Feb. 23 court hearing in Wilmington, Del., to seek approval of an agreement terminating the plan and handing the assets over to the PBGC. Under the agreement, Reichhold doesn’t acknowledge the accuracy of the PBGC’s underfunding estimate. The company said that no prospective buyers of the business would have assumed the pension plan and its liabilities. Including secured debt that was forgiven, the lenders paid $146.7 million. The junior noteholders will take over non-bankrupt affiliates through consensual foreclosure, using a sale structure laid out when the chapter 11 reorganization started last year.