Tags: Calpers | protection | Stockton | bankruptcy

Calpers Denied Special Protection in Stockton Bankruptcy

Wednesday, 01 October 2014 07:44 PM

The California Public Employees’ Retirement System doesn’t deserve special protection as a creditor in a municipal bankruptcy, a federal judge said in the debt restructuring of Stockton, a case that pits public pension advocates against Wall Street creditors.

Bankrupt California cities can cancel their contracts with Calpers because federal law overrules the legal projections the state has given the pension fund over the decades, U.S. Bankruptcy Judge Christopher Klein said Wednesday in Sacramento.

“That’s huge,” Dale Ginter, an attorney who specializes in municipal bankruptcy, said in an interview. The ruling would make it more tempting for struggling California cities to use Chapter 9 of the U.S. Bankruptcy Code to cut debts, just as private companies use Chapter 11.

“It means a city can get control of its retiree liabilities and pension liabilities via Chapter 9,” said Ginter, who represented retirees in the bankruptcy of Vallejo, California.

Stockton, a city of 298,000 about 80 miles (130 kilometers) east of San Francisco, filed for bankruptcy in 2012 after spending too much on downtown improvement projects and seeing its property-tax revenue plunge in the housing crisis. Creditors filed $1.18 billion in claims.

Franklin Cuts

Its debt plan would protect Calpers, the $296 billion pension fund, from cuts while imposing steep reductions on money manager Franklin Resources Inc. Under the proposal, Calpers would be fully repaid while two Franklin funds would get back only about 1 percent of the unsecured portion of the $36 million they are owed.

Klein made his ruling during a hearing in federal court on Stockton’s plan. He said he may rule on the plan itself this month.

The state’s public employee retirement law “is simply invalid in face of the U.S. Constitution,” the judge said. Calpers contracts with cities can be canceled like other agreements that can be modified in federal court under the U.S. Bankruptcy Code, he said.

“We disagree with the judge’s opinion on the issue of pension impairment,” Brad Pacheco, a Calpers spokesman, said in an e-mail. He said the ruling wouldn’t be a precedent for any other bankruptcies.

‘Can’t Function’

“What’s important to keep in mind is what the city of Stockton stated in court Wednesday: that they can’t function as a city if their pensions are impaired,” Pacheco said.

Stockton designed its bankruptcy exit plan assuming that Calpers would hold a $1.5 billion lien on city assets if the pension contract was canceled. Without the lien, the bargaining position of Calpers in the case would have been severely weakened.

Klein Wednesday said the pension fund’s claims against a city in bankruptcy are unsecured and aren’t superior to debts including unsecured bonds.

Only a handful of California cities or counties have ever filed for bankruptcy, which means there are few major legal precedents to guide municipal officials about what’s possible in Chapter 9. For that reason, Klein’s ruling is likely to be influential, Ginter said.

Bankruptcy lawyers and public-pension advocates have watched Stockton’s case to see whether Calpers would be given deference by Klein, or if the judge would side with San Mateo, California-based Franklin.

Plan Attacked

Franklin has attacked the bankruptcy plan as unfair because city worker pensions aren’t being reduced, while investors are being forced to take less than they are owed. Franklin has long claimed that Calpers shouldn’t be given any special treatment.

Even though the judge concluded that Stockton can cancel the Calpers contract, the city still has a chance to convince him the plan should be approved anyway.

Klein agreed with many of Franklin’s key positions on the treatment of Calpers. He has said previously that if he ruled against Calpers, he may still approve Stockton’s plan.

The case is In re Stockton, 12-bk-32118, U.S. Bankruptcy Court, Eastern District of California (Sacramento).

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The California Public Employees' Retirement System doesn't deserve special protection as a creditor in a municipal bankruptcy, a federal judge said in the debt restructuring of Stockton, a case that pits public pension advocates against Wall Street creditors.
Calpers, protection, Stockton, bankruptcy
Wednesday, 01 October 2014 07:44 PM
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