Vallejo Water Bonds & Memorial Day
May 27, 2011
David R. Kotok

Vallejo Wins Approval for Creditor Vote on Bankruptcy

“Vallejo, California, the biggest U.S. city in bankruptcy, won court permission to send its exit plan to creditors for a vote after retired workers dropped their objections. U.S. Bankruptcy Judge Michael S. McManus in Sacramento, California, approved a disclosure statement for the plan in an order. McManus will take creditors’ votes into account when he decides whether to approve the plan at a hearing to be scheduled in the coming weeks. A hearing on the disclosure statement had been set for today. The retirees, represented by a court-sanctioned committee, were the last major objectors to the plan, which would cut labor costs and stretch out payments to other creditors.“The committee was concerned if the bankruptcy dragged on, their actual pensions might be jeopardized,’’ R. Dale Ginter, an attorney for the committee, said in a May 23 interview. During the bankruptcy, the city succeeded in cutting costs by firing employees, renegotiating union contracts and reducing what it pays to subsidize retiree health care. Vallejo, a onetime U.S. Navy town of about 120,000 on San Francisco Bay, sought protection from creditors in May 2008 under Chapter 9 of the U.S. Bankruptcy Code, after the recession eroded tax revenue and unions rejected wage cuts. Chapter 9 allows municipalities to reorganize debt rather than liquidate. The plan doesn’t alter securities tied to designated revenue sources, such as about $175 million in water revenue bonds, and other special tax obligations secured by special revenue of the city’s restricted funds, according to the documents. The case is In re City of Vallejo, 08-26813, U.S. Bankruptcy Court, Eastern District of California (Sacramento).” Source: Today’s (5-27-11) Bloomberg Municipal Market Brief.

First we wish readers a safe and enjoyable holiday as we celebrate one of the great American traditions this weekend. We honor those who sacrificed for our freedoms. The observation of an American flag in a cemetery will part of my weekend ritual.

Another great American tradition is found in the millions of decisions that pass through and from our court system. We are a nation of law. We have a system that respects contracts. It carries with it the notion that obligations that are undertaken are to be fulfilled in economic terms if they are reasonable.

Vallejo’s municipal bankruptcy occurred because the politicians who ran the city ignored these fundamental values and obligated the city taxpayers to unreasonable burdens. Now the court is throwing these excessively costly burdens out. After $10 million of litigation, we are getting to some resolution. Meanwhile, please note the highlighted portion of this news report. It states that the payment stream for the essential-service revenue bond that funded the supply of water to the city is intact.

We have written many times about the importance of essential-service revenue and of the legal construction that protects these bond holders. Here is a prime example. The city is in bankruptcy, yet the bond holder is getting paid.

At Cumberland, we continue to find value in well-researched tax-free and taxable municipal bonds. It requires hard work, and it pays off.

Have a good Memorial Day weekend.

David R. Kotok, Chairman and Chief Investment Officer

Category: Fixed Income/Interest Rates, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

4 Responses to “Vallejo Water Bonds & Memorial Day”

  1. Dow says:

    Another great American tradition is found in the millions of decisions that pass through and from our court system. We are a nation of law. We have a system that respects contracts. It carries with it the notion that obligations that are undertaken are to be fulfilled in economic terms if they are reasonable.

    That’s true from the rich who have access to those courts. It’s far from true for the vast majority of us.

  2. Dow,

    to your Point: “Preface: Some defendants are no longer allowed to see the “secret evidence” which the government is using against them. See this and this.

    The U.S. Supreme Court has ruled that judges can throw out cases because they don’t like or believe the plaintiff … even before anyone has had the chance to conduct discovery to prove their case. In other words, judges’ secret biases can be the basis for denying people their day in court, without even having to examine the facts. Judges are also becoming directly involved in politics with the other branches of government.

    Claims of national security are being used to keep the shenanigans of the biggest banks and corporations secret, and to crush dissent.

    But this essay focuses on something else: the fact that the laws themselves are now being kept secret.

    America is supposed to be a nation of laws which apply to everyone equally, regardless of wealth or power…”
    http://www.ritholtz.com/blog/2011/05/weve-gone-from-a-nation-of-laws-to-a-nation-of-powerful-men-making-laws-in-secret/

    you’ll have to excuse ol’ Kotok, he labors under other delusions, as well..

    see, for instance: “…Central-bank independence helps maintain consistent economic growth. It also restrains inflation…”
    http://www.ritholtz.com/blog/2011/05/attacking-central-bank-independence/

  3. rip says:

    So why exactly should everyone but the bondholders take a haircut? To save your job???? To save Munis? The great escape hatch for communities that want to live beyond their means?

    There are whole layers of responsibilities that we have defined for ourselves.

    Fiduciary is the first one that comes to mind. Moral is the second, or first.

    And contract comes in a weak third.

    So hey Dude. Provide your ranking. Or did you already?

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