It remains to be seen whether a judge’s statement Wednesday that bankrupt Stockton, Calif., can cancel its contracts with CalPERS will have an impact on retirees and weaken vested pension rights.
For one thing, legal experts on pension issues point out that other judges will not be bound to follow U.S. Bankruptcy Judge Christopher Klein. But more importantly, they say Mr. Klein might still accept Stockton’s plan of adjustment, which continues payment to the $294.2 billion California Public Employees’ Retirement System, Sacramento, preserving the retirement benefits of retirees and current city workers.
“I don’t think the ruling sets a precedent and creates court appeals unless the judge cuts retiree benefits,” said attorney Teague Paterson of Beeson, Tayer & Bodine in an interview. Mr. Paterson wrote a brief for the Stockton case on behalf of the Peace Officers Research Association of California.
Money management firm Franklin Resources Inc. has objected to the city’s plan that fully repays CalPERS but only pays back 1% of the unsecured portion of $36 million in city debt held by two Franklin bond funds.
The judge backed Franklin Wednesday, saying Stockton can cancel the CalPERS contract, but also said the city still has a chance to convince him the plan of adjustment should be approved. Mr. Klein has said previously that if he ruled against CalPERS, he might still approve Stockton’s proposal.
He ended Wednesday’s hearing saying he will rule Oct. 30 on the plan of adjustment while encouraging Franklin and the city to try to settle their differences before he rules.
City of Stockton spokeswoman Connie Cochran said any mediation between Franklin and the city would be confidential. She said Stockton plans to present to Mr. Klein its plan to preserve the benefits of city retirees and fully repay CalPERS.
Franklin spokeswoman Cheryl Sanclemente did not respond to questions about whether negotiations are planned between the money manager and the city. She issued a statement that said: “We are not willing to accept this treatment under Stockton’s plan of adjustment because it makes no attempt to treat all creditors fairly and equitably, and it fails the bankruptcy code’s requirement that Stockton provide Franklin with a reasonable recovery paid over time.”
A CalPERS spokesman said officials there disagree with the judge.
“We disagree with the judge’s opinion on the issue of pension impairment,” spokesman Brad Pacheco said in an e-mail Wednesday. He said the ruling wouldn’t be a precedent for any other bankruptcies.
Still, some attorneys believe the ruling would make it more attractive for California cities with unmanageable pension programs to use bankruptcy law to cut debt, just as private companies do.
“It means a city can get control of its retiree liabilities and pension liabilities,” said Dale Ginter, of counsel with Downey Brand LLP, who represented retirees in the bankruptcy of Vallejo, Calif. “That’s huge.”
Bankruptcy lawyers and public pension advocates nationwide have watched Stockton’s case to see whether CalPERS would be given deference, or if the judge would side with Franklin.
Stockton 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.
Bloomberg contributed to this story