Retired public employees in bankrupt Stockton, Calif., may see their pensions decrease next as the city wrangles with creditors.
The biggest U.S. city in bankruptcy, Stockton is preparing a plan for paying debt that may propose compensating some creditors less than the principal owed, setting up a likely court challenge from the creditors that the city's pension contributions be subject to cuts as well.
“As retirees, we are hoping the city is not forced, required, induced to affect pensions,” said Dwane Milnes, a former Stockton city manager and president of the Association of Retired Employees of the City of Stockton, which represents more than 800 retirees.
The city of 296,000, an agricultural center about 80 miles east of San Francisco, adopted a budget for operating under bankruptcy that included reducing health-care premium payments for its retirees last July and eliminating them entirely a year later to deal with a $540 million unfunded liability. About 1,100 of the city's 2,400 retirees received medical benefits last year.
During pre-bankruptcy talks with creditors, Stockton proposed cutting payments to some creditors while preserving funding to the California Public Employees' Retirement System. The city will owe an estimated $29.8 million for its retiree benefits in fiscal 2014, according to an actuarial report released by the fund in October.
The creditors, including Hamilton, Bermuda-based Assured Guaranty Corp. and San Mateo, Calif.-based Franklin Resources Inc. who stand to be paid less than what they're owed, have argued that CalPERS should also face cuts. Payments to the pension fund shouldn't be given priority over debt owed them, Assured and Franklin claim.
The biggest U.S. public pension said that under state law, it isn't authorized to reduce the city's contributions.
“CalPERS is different from general unsecured creditors of Stockton, such as bond insurers,” Peter Mixon, CalPERS's general counsel, said in a statement. “CalPERS is a public pension plan governed by the California constitution and other state laws. CalPERS must administer the system according to these laws.”
Donald Cutler, a spokesman for Assured, and Stacey Johnston Coleman, a Franklin spokeswoman, declined to comment.
Kathy Miller, a Stockton council member, said the city eliminated the retiree medical premium payments because it was something officials could control. Stockton has continued to make full payments to CalPERS.
“The city wants to abide by legal requirements imposed on us by CalPERS and continue to negotiate in good faith with our creditors,” Ms. Miller said in a telephone interview. “We feel that our retirees and our employees have already given their fair share toward the solution.”
Stockton's council voted to pursue bankruptcy in June, citing accounting errors, escalating retiree health-care costs and a drop in tax revenue from the recession.
The city is one of three municipalities in bankruptcy that have said they'll try to force creditors, including bondholders, to take less than the principal owed. The others are San Bernardino, Calif., and Jefferson County, Ala.
A federal bankruptcy judge in Sacramento agreed April 1 to let the Stockton remain under Chapter 9 bankruptcy protection over objections from creditors.
The city is next required to provide the court a so-called plan of adjustment, its blueprint for paying its debt in bankruptcy, which will be open to objections from creditors who could argue that the plan discriminates by treating certain creditors differently than others.
“If a plan is proposed that does not deal with CalPERS and if the capital market creditors reject their treatment under the proposed plan, then I will have to focus on the question of unfair discrimination,” U.S. Bankruptcy Judge Christopher M. Klein said in his April 1 ruling.
“The city is going to have a difficult time confirming a plan over an objection and claim of unfair discrimination without being able to explain that problem away,” Mr. Klein said.
“That problem is probably going to require me to get down into the nitty-gritty of the CalPERS situation,” he said. “And I, at this point, have no clue how that's going to come out.”
The city expects to have a plan of adjustment by the year's third quarter, which starts July 1, Connie Cochran, a Stockton spokeswoman, said by e-mail.