“And some have blamed California’s state pension system, Calpers, for locking Stockton into a plan it cannot afford by erroneously contending years ago that the benefits would not cost much because investment gains would pay for them…

…(United States Bankruptcy Court) Judge Klein said he had not changed his thinking about pensions since his previous decision on the issue, made from the bench earlier this month. He said at that point that Stockton was free to abrogate its contract with Calpers in bankruptcy and that Calpers would be a mere unsecured creditor with no special legal tools to improve its chance of recovery.”, Mary Williams Walsh, “Judge Approves Bankruptcy Exit for Stockton, Calif.”, New York Times

“I’m one of those Californians who blame Calpers for our state’s unsustainable state and municipal pension plans. I think it’s so hypocritical of Calpers to constantly lecture private, publicly-traded corporations on their corporate governance (and other matters), when they have created this enormous public pension mess for our state and its citizens, don’t you? Californians’ children and grandchildren are going to be paying for this political and financial catastrophe for decades. I don’t know if this is true, but it is too good not to discuss and I will take it down if someone provides me evidence that it is not true. I was told recently that the City of Redlands pays three fire captains about $250,000 a year, each, for life, yet only one is an active fire captain!!! The other two are retired and probably retired at 50-years old and have other jobs/careers!!! I know this is true. I read in another article covering Stockton’s bankruptcy and public pensions that Stockton’s police pension expenses (probably expensed at levels that are not even fully-funding these pensions) are CURRENTLY, and will be after emerging from bankruptcy (thanks to the cities’ politicians not having the courage to restructure them in bankruptcy), over 50% of the current costs for all police labor!!!! If that isn’t unsustainable, what is?”, Mike Perry

Restructuring & Bankruptcy

Judge Approves Bankruptcy Exit for Stockton, Calif.

By Mary Williams Walsh

Stockton City Hall. A judge approved a bankruptcy plan that cuts retiree health benefits, but leaves pensions intact. 

Stockton City Hall. A judge approved a bankruptcy plan that cuts retiree health benefits, but leaves pensions intact.Credit Max Whittaker/Reuters

A judge on Thursday confirmed a plan by Stockton, Calif., to exit bankruptcy, rejecting arguments that it unfairly discriminated among creditors by chopping a mutual fund’s recovery to near zero while shielding city retirees from any impairment at all.

Stockton had asked the court to approve its plan, which calls for budget cuts, haircuts for bondholders and even a sales tax increase, which city residents approved in a referendum last year. But it did not touch pensions, not even the benefits that current workers hope to earn in future years. Prospective pension cuts are routine when companies go bankrupt under Chapter 11 and even outside of bankruptcy.

But Judge Christopher Klein of the United States Bankruptcy Court for the Eastern District of California in Sacramento said he found Stockton’s proposed plan acceptable, noting that it eliminated the retirees’ health benefits.

“I’ve looked long and hard at this case and the responses that have been made, including the alternative of putting the whole situation back to Square 1, which is what would be required” if he rejected the exit plan, Judge Klein said. That, he added, would mean running up millions more dollars’ worth of legal fees for an alternative exit plan that would probably not be worth the additional cost.

“This plan, I’m persuaded, is about the best that could be done, or is the best that could be done,” he said.

Judge Klein cited the “significant concessions” that Stockton’s employees and retirees had made, especially the cancellation of the retiree health plan, which he said amounted to a $550 million loss. Until Stockton ran into severe financial trouble with the bursting of the mortgage bubble, it had promised all city workers and their dependents free health care in retirement without setting aside any money to cover the cost. Judge Klein also noted that because the city workers’ pay was being reduced, that would lead to smaller pensions because the benefits are linked to each worker’s salary before retirement.

He did not provide a detailed analysis of Stockton’s pension costs, but said that, over all, Stockton’s exit plan was “feasible.”

Stockton, like many places in California, offers its police a pension plan that allows officers to retire at age 50, with pensions of up to 90 percent of their pay with 30 years of service, plus annual cost-of-living increases. Many analysts say such pensions are unsustainable, especially for a distressed city like Stockton. And some have blamed California’s state pension system, Calpers, for locking Stockton into a plan it cannot afford by erroneously contending years ago that the benefits would not cost much because investment gains would pay for them.

At the same time, Judge Klein said he had not changed his thinking about pensions since his previous decision on the issue, made from the bench earlier this month. He said at that point that Stockton was free to abrogate its contract with Calpers in bankruptcy and that Calpers would be a mere unsecured creditor with no special legal tools to improve its chance of recovery.

Calpers had been arguing that if Stockton were to terminate its pension plan, it would have to pay a termination fee of $1.6 billion — the amount Calpers had said was necessary to pay all of Stockton’s current and future retirees their benefits for the rest of their lives, at no risk to Calpers as plan administrator. Calpers had also argued that it possessed a special lien that allowed it to foreclose on $1.6 billion worth of Stockton’s assets if the city failed to pay.

But Judge Klein reiterated Thursday that federal bankruptcy law pre-empted the state law that gave Calpers the lien. Without the lien, the relationship between Calpers and Stockton became contractual, he said.

“Bankruptcy is all about the impairment of contracts,” Judge Klein said. “That’s what we do.”

That part of Judge Klein’s decision left the door open for other California cities to end their relationships with Calpers, at relatively low cost, by declaring bankruptcy. But the finding was moot in Stockton’s case because the city was not seeking to terminate its plans.

Doing that, the judge pointed out, would be harder for Stockton because while its relationship with Calpers was contractual, its relations with its workers were based on collective-bargaining agreements, which are harder to abrogate in bankruptcy than “garden-variety contracts.”

As a matter of law, Judge Klein had no authority to order Stockton either to cut the pensions or leave them intact. For constitutional reasons, Chapter 9 municipal bankruptcy gives judges little or no power to interfere with cities’ governmental activities. Stockton’s bankruptcy lawyer, Marc A. Levinson, said the city would use its “business judgment” — something the judge said he would defer to — to cut other compensation but leave its pension plans alone. Mr. Levinson had testified that if Stockton cut the pensions, its workers, especially the police, would stampede for the exits in search of jobs in other cities that still offer similarly lucrative pensions.

The idea that Stockton might have to cut pensions before it could emerge from bankruptcy arose from the objections of a holdout creditor, the mutual fund company Franklin Templeton Investments. Two of its funds had bought $36 million of bonds that Stockton issued in 2009.

Earlier, Judge Klein had found that $4 million of Franklin’s holdings was secured, and Stockton agreed to pay that much in cash. But to settle the remaining $32 million, Stockton proposed paying just $300,000, or less than a penny on the dollar. Franklin said this was unfair discrimination because the pensions were going to be paid in full. It had asked to be reclassified in a separate group from the retirees because that would turn the bankruptcy case into a cramdown — a situation where a judge cannot approve a debt adjustment plan that unfairly discriminates among creditors in similar classes.

Judge Klein said it was Franklin’s request for reclassification that made him sort out the complicated relationships between Stockton, Calpers and Stockton’s employees and retirees. Having done that, he said, he believed the classifications were correct. He also said Franklin should take its $4 million secured recovery into account along with its negligible unsecured recovery. That gives it a total recovery of 12 cents on the dollar, “which is not much, but certainly higher than what some people have asserted.”

A version of this article appears in print on 10/31/2014, on page B4 of the NewYork edition with the headline: Judge Spares Pensions in Stockton, Calif., Bankruptcy.

Posted on November 5, 2014, in Postings. Bookmark the permalink. Leave a comment.

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