Judge allows Stockton to proceed with bankruptcy plan
Judge approves Stockton’s plan to repay creditors
By Dale Kasler
A bankruptcy judge today approved the city of Stockton’s plan for repaying creditors, a plan to keeps pensions intact despite the objections of a disgruntled investment firm.
U.S. Bankruptcy Judge Christopher Klein approved the city’s plan during a two hour hearing in U.S. Bankruptcy Court in Sacramento, rejecting the complaints from San Mateo-based Franklin Templeton Investment over how it is being treated. Franklin, which is getting repaid about 12 cents on the dollar over some bond debts, had argued its treatment was unfair in light of the city’s refusal to reduce pension contributions to CalPERS.
On Oct. 1, in a precedent setting decision, Klein ruled that the city could reject or “impair” its pension plans, a decision that sent reverberations through the retirement and financial worlds. But today he approved a Stockton plan that doesn’t touch pensions, enabling CalPERS and pro-pension union advocates to breathe a little more easily.
“It makes the (Oct. 1) ruling less significant,” said CalPERS General Counsel Matthew Jacobs, though he added: “It still exists.”
Jacobs said CalPERS, which has steadfastly fought to keep pensions untouched, would consider its legal options with regard to the earlier ruling.
Pension reform advocates were disappointed with the judge’s approval of the city’s plan, saying they doubt Stockton will be able to operate without taking an axe to its $29 million-a-year obligation to CalPERS.
“They’re betting on rosy assumptions,” said Dan Pellissier, a pension reform advocate in Sacramento.
City officials, however, were thrilled with today’s decision, which they said will enable the city to move forward after years of financial crisis. The city filed for Chapter 9 bankruptcy in June 2012.
“We are on a more stable financial footing,” said City Manager Kurt Wilson. He added that police officers and other city employees have been leaving Stockton, in part because of uncertainty over their pensions and the city’s financial troubles. He believes the exodus will now stop.
“That’s going to be a very big help for us,” Wilson said.
In his ruling, Klein noted that employees have already agreed to pay cuts and other concessions, and that retirees were stripped of their medical plans. If the city were to reduce its pensions to free up cash for Franklin Templeton, workers and retirees would be “the real victims,” the judge said.
The Stockton case has been shaping up as a major test of the ironclad nature of public employee pensions in California. Klein acknowledged that his earlier ruling has “undermined” some of that assurance.
Stockton officials said if the city reduced its payments to CalPERS, it would trigger a complicated mechanism that would result in an estimated 60 percent reduction in pension benefits to current retirees and employees. That would have sent even more employees headed to the exits, city officials said. As it is, the city has about 100 fewer police officers than it did before filing for bankruptcy, Wilson said.
“It would be no simple task to go back and redo the pensions,” the judge said. James Johnston, a lawyer for Franklin Templeton, said the firm is “disappointed” in the ruling and will consider its options.