Arguments raised by CalPERS and Franklin Resources in the municipal bankruptcy of Stockton were emphatically rejected by a federal judge, who accused the pension fund of bullying its way through the case.
The $296.5 billion California Public Employees’ Retirement System, Sacramento, said it had a potential claim of $1.6 billion in Stockton’s bankruptcy. Franklin’s high-yield bond funds claimed the city’s debt adjustment plan violated basic principles of fairness because bondholders were bearing the brunt of the losses, while public worker pensions are being paid in full.
U.S. Bankruptcy Judge Christopher M. Klein shot down both arguments in a 54-page opinion Wednesday and said he will sign a confirmation order bringing an end to the city’s municipal bankruptcy, which began in June 2012.
In the near term, the pension fund came out a victor in the bankruptcy because Stockton decided to pay pensions in full and impose no loss on CalPERS. Mr. Klein’s legal rulings, however, might have detrimental consequences for CalPERS in the long term.
The judge said provisions of California law that purport to bar a city from terminating a pension fund or withdraw from the CalPERS program are unenforceable. He also said a lien given by state law in favor of CalPERS is invalid under bankruptcy law.
“CalPERS has bullied its way about this case with an iron fist,” Mr. Klein wrote. But the bully “turns out to have a glass jaw,” he said.
Mr. Klein rejected arguments by CalPERS that a municipal bankruptcy can’t affect public pensions in California. He also said a $1.6 billion lien that might have benefited CalPERS can be set aside under federal bankruptcy law.
According to the judge, the section of the bankruptcy code that allows a state to control its cities doesn’t bar the court from either voiding the CalPERS lien or allowing a municipality to exit the pension system.
While Stockton isn’t junking its deal with CalPERS, the judge’s rulings can be trotted out if another California city goes bankrupt and decides to terminate state pensions.