“Historic” Ruling Expected in Stockton Bankruptcy Case; Can A Bankrupt California City Cut Pensions?

Can a bankrupt California city legally reduce both its payments to CalPERS and the pension benefits it promised to its workers?

Those are the questions that will likely be answered by the end of the day Wednesday in what’s already being called a “historic” ruling. From the Sacramento Bee:

After months of buildup, U.S. Bankruptcy Judge Christopher Klein is likely to rule on a protest filed by one of Stockton’s creditors, Franklin Templeton Investments. Franklin said the city can’t continue paying its full pension contribution every year to CalPERS while offering a meager payout on the $36 million owed to the investment firm.

At a July 8 hearing, Klein hinted that he was sympathetic to Franklin’s view. “I might be persuaded that … the pensions can be adjusted,” he said.

It’s not at all certain whether Stockton would reduce its pension payments, even if Klein says it can. Under state law, CalPERS says it would have no choice but to end Stockton’s pension plan. Pension benefits would drop by an estimated 60 percent, which city officials believe would trigger a mass exodus by police officers and other employees.

Regardless of what Stockton does, CalPERS has been fighting strenuously to avoid a legal ruling that says pension contributions are no longer untouchable. The giant pension fund’s lawyers say CalPERS is merely trying to protect a system that serves the public well.

“Pensions secure financial futures and help the state and its local subdivisions recruit and retain valuable public servants,” CalPERS’ lawyers said in a recent court filing. “Putting a cloud over public pensions only invites worry and uncertainty about the security of those pensions.”

Public pensions have been considered ironclad for generations. State legislatures are free to reduce benefits for new workers, as California did in 2013, but it’s long been agreed that promises made to existing employees and retirees must be kept.

Those legal protections, however, have been under duress ever since Stockton filed for bankruptcy protection in 2012. Several of the city’s Wall Street bond creditors, who lent the city more than $200 million during the housing boom, warned that they would fight in court if they were left with peanuts and the city’s $29 million-a-year contribution to CalPERS was left intact.

A bankruptcy judge ruled earlier this summer that Detroit could indeed cut pension benefits as part of its bankruptcy proceedings.

But CalPERS argues that the ruling doesn’t apply to California, because California protects pension benefits under its constitution. Michigan doesn’t.