Stockton bankruptcy | Pension360

Judge in Stockton Bankruptcy Calls CalPERS a “Bully”

The federal judge overseeing Stockton’s bankruptcy, Judge Christopher Klein, this week called CalPERS a “bully” with a “glass jaw”.

The comments came as Klein put his Stockton ruling in writing for the first time.

Moody’s: Stockton Ruling Good News For “Financial Profile” of CalPERS

Moody’s released a report Wednesday outlining the credit agency’s thoughts on CalPERS in the wake of the Stockton ruling.

The agency affirmed CalPERS’ rating of Aa2, which is the third-highest rating available. From the report:

Favorable outcomes for CalPERS in the Stockton, CA and San Bernardino, CA bankruptcy proceedings lend further support to CalPERS improving financial profile because it reduces the likelihood that other CalPERS contracting employers will race to declare bankruptcy to reduce growing pension liabilities. The combination of a reduction in the likelihood that other distressed California municipalities will pursue bankruptcy to reduce pension liabilities and contribution rate increases on contracting employers in each of the last three years should improve the CalPERS funded status and its ability to cover the expected longer lives of retirees.

California Attorney: Bankruptcy “Not a Practical or Desirable” Way To Cut Pensions

Teague Paterson, an attorney from Sacramento specializing in labor law, has penned a column in Monday’s Sacramento Bee in which he explains his position that bankruptcy is “not a practical or desirable” way to cut pension benefits.

From the column:

Imagine for a moment that you have run into deep financial trouble and have decided to file for bankruptcy protection. Your credit rating plummets, your home is sold at a fire sale, and you can’t rent an apartment or buy a car. You spend long hours at the negotiating table as creditors pick over the remains of your finances. Ultimately, you place your future in the hands of a total stranger, the bankruptcy judge.

Isn’t that a scenario that you would try to avoid at all costs?

If the consequences for an individual facing bankruptcy are devastating, the consequences for a municipality are 10 times as dangerous. Bankrupt cities face soaring crime rates, shrinking property sales, and the reduction or elimination of basic public services. It’s is not a decision that an elected official or city manager would willingly make unless there were no other options, as the decision by a bankruptcy judge presiding over Stockton’s bankruptcy makes clear.

Judge Christopher Klein’s ruling Thursday to approve Stockton’s bankruptcy plan confirms that the situation in Stockton will have little impact over the larger national debate on public pensions. Municipalities will not be filing for bankruptcy in waves in efforts to jettison pension debt.

For the very few severely distressed cities that may consider bankruptcy, the question will not be whether they can reduce pensions, but whether they should. In Stockton, the answer to that question was clear to all with a stake in Stockton’s future – and after two years of litigation that cost tens of millions of taxpayer dollars, the bankruptcy judge agreed.

Another key excerpt from the column:

Despite the media attention to cities such as Stockton and Detroit, municipal bankruptcy is exceedingly rare. According to one analysis, 13 local governments had bankruptcy filings since 2008. Five of those have been dismissed. To put it in context, there are more than 39,000 local governments in the U.S.

Although the bankruptcy process threatened to rob Stockton of its ability to make the best decisions for its residents, ultimately the judge accepted the city’s decision. In Stockton, the practicalities of running a city with an eye toward a brighter future shaped this outcome. Judge Klein acknowledged the serious and considerable pre-bankruptcy concessions accepted by Stockton’s employees, and the virtual guarantee that employees would leave to work elsewhere if Stockton reduced their compensation any further.

Stockton faced a unique set of circumstances brought on by revenue losses and a crippling national recession. Thankfully, it’s a situation that the overwhelming majority of municipalities will never have to face. As much as pension opponents would like to focus their analyses of Stockton as a blow to pension security, bankruptcy is simply not a practical or desirable option for cities dealing with pension obligations.

Read the whole piece here.

Photo by TaxRebate.org.uk

Judge Approves Stockton Bankruptcy Plan; Pensions To Be Protected

A bankruptcy judge on Thursday afternoon approved the bankruptcy plan of Stockton, California. As part of the plan, the pensions of city workers will remain intact.

Creditors, on the other hand, will not be so lucky. From the LA Times:

A federal bankruptcy judge approved the city of Stockton’s bankruptcy recovery plan, allowing the city to continue with planned pension payments to retired workers.

The case was being closely watched after the judge ruled this month that the city’s payments to the California Public Employees’ Retirement System could be cut in bankruptcy just like any other obligation.

If Judge Christopher M. Klein had rejected Stockton’s plan and forced the city to slash its payments to CalPERS, it could have opened the door for other cities struggling with escalating pension costs to follow suit.

Stockton officials had argued that they couldn’t afford to cut pensions or to create another retirement plan for city employees. They said employees would leave Stockton for other cities offering retirement benefits through CalPERS.

CalPERS had said that if Stockton left the state retirement system, the city would immediately owe it $1.6 billion — far more than the city’s current bill to the pension plan.

On Thursday, Klein said that workers had already taken hits in the bankruptcy. He said Stockton’s salaries and benefits for workers had been higher than those at other cities, but that workers had agreed after the bankruptcy filing to take big cuts, including eliminating the free medical care they received in retirement.

“It would be no simple task to go back and redo the pensions,” Klein said Thursday.

He added, “This plan, I’m persuaded, is the best that can be done.”

Klein said that rejecting the plan after two years in court and tens of millions of dollars in legal and other fees would have put the case back to “square one.”

The city’s plan slashes payments to other creditors, including Franklin Templeton, an investment firm that holds more than $36 million in bonds the city used to borrow money. Franklin had asked Klein to reject the city’s plan so that it could get more of its money back.

CalPERS Chief Executive Anne Stausboll said of the decision:

“The City has made a smart decision to protect pensions and find a reasonable path forward to a more fiscally sustainable future…We will continue to champion the integrity and soundness of public pensions – to protect the benefits that were promised to the active and retired public employees who participate in the CalPERS pension plan.”

CalPERS CEO Addresses Stockton Ruling

The CalPers Building in West Sacramento California. — The CalPERS building in West Sacramento, California.

Anne Stausboll, CEO of the California Public Employees Retirement System, released a statement addressing a recent court ruling that the bankrupt city of Stockton could cut pensions and stop contributing to CalPERS as part of its bankruptcy proceedings.

The statement in full:

The ruling last week by a federal bankruptcy judge in Stockton’s bankruptcy case has caused many to speculate about the future of pensions. Public employees, retirees, employers, lawyers, taxpayers, and journalists have legitimate questions and concerns.

As the administrator of pensions, the California Public Employees’ Retirement System does not win or lose in this situation. If pensions are reduced in bankruptcies, the only losers are public employees.

Contrary to the belief of many pension critics, CalPERS is no Goliath. Franklin Templeton Investments – the last bondholder standing in the way of the city of Stockton’s plan to rebuild – is no David.

Franklin Templeton is a sophisticated Wall Street investor that did its due diligence, analyzed the risks, and decided to make a $36 million investment in Stockton. As it turns out, the investment did not pay off. That’s how the investment world works. Franklin needs to move on.

The real Davids are the current and former employees of the city of Stockton whose retirements are at stake. These librarians, secretaries, firefighters, police officers, 911 dispatchers, and school custodians chose to serve the public at lower salaries in return for the promise of a reliable and secure pension. Their pensions are deferred compensation that they earned by working 10, 20, and sometimes 30 years in service to their communities.

Public employees contribute from every paycheck toward their own retirement. It is not a bonus or optional benefit that an employer may choose to not pay during hard times.

We applaud the leadership of Stockton officials in finding solutions to protect the pension promises made to its public employees while forging a reasonable path toward a fiscally sustainable future.

CalPERS will stand by Stockton, its employees, and residents, and will continue to champion those who really stand to lose – the real Davids – the public employees and retirees who spent their careers serving our communities and California.

Photo by Stephen Curtin

Stockton Can Cut Pensions And Stop Paying CalPERS. But Will It?

In a groundbreaking decision, a judge ruled yesterday that the bankrupt city of Stockton, California could indeed cut worker pensions and halt payments to CalPERS. From the LA Times:

A federal bankruptcy judge dealt a serious blow to California’s public employee pension systems by ruling Wednesday that payments for future worker retirements can be reduced when a city declares bankruptcy — just like its other debts.

U.S. Bankruptcy Judge Christopher Klein ruled that bankruptcy law supersedes California pension laws that require cities to fund their workers’ future retirement checks.

“I’ve concluded the pension could be adjusted,” Klein said.

The potentially groundbreaking decision came after a large creditor of Stockton, which filed for bankruptcy protection two years ago, asked the judge to reduce the amount the city owes to the California Public Employees’ Retirement System, the nation’s largest public pension fund.

Until now, CalPERS had argued successfully in the bankruptcy cases of other California cities that amounts it requires for public worker pensions could not legally be reduced.

But just because Stockton can cut pensions doesn’t mean the city will. The city’s current bankruptcy plan doesn’t include pension cuts or the halting of payments to CalPERS. From the Sacramento Bee:

The practical effect of Klein’s ruling is unclear. It depends in large part on whether Klein will accept Stockton’s financial reorganization plan – a plan under which the city promises to keep making its annual $29 million pension payments in order to retain its relationship with CalPERS.

If Stockton gets Klein’s approval and can resolve its bankruptcy without slashing pensions, the impact of Klein’s ruling is blunted somewhat. But Klein won’t rule on the city’s plan until Oct. 30.

Because of Stockton’s pledge, CalPERS attorney Michael Gearin downplayed the decision and said it doesn’t force the city to cut its pension payments. “It doesn’t establish a precedent. Those were his comments about a hypothetical city” that wants to cut ties with the California Public Employees’ Retirement System, he said.

The city seems to have an interest in working to keep pensions intact. Staying with CalPERS, on the other hand, is being viewed as a reluctant necessity. From the Sacramento Bee:

City officials have said they have no choice but to stick with CalPERS. If it doesn’t pay the pension fund in full, default would occur, and the city would either have to make a one-time payment of $1.6 billion to keep pensions whole or let CalPERS slash benefits by 60 percent. The result would be a mass exodus of employees, the city said, creating an enormous setback just as the troubled city, saddled with poverty and a high crime rate, is starting to get back on its feet.

CalPERS released a statement immediately after the ruling expressing their disappointment with the decision and claimed that the ruling was “not legally binding”. From Reuters:

“This ruling is not legally binding on any of the parties in the Stockton case or as precedent in any other bankruptcy proceeding and is unnecessary to the decision on confirmation of the City of Stockton’s plan of adjustment,” Calpers spokeswoman Rosanna Westmoreland said in an emailed statement.

“CalPERS will reserve any further comment until such time as the court renders its final written decision. What’s important to keep in mind is what the City of Stockton stated in court today: that they can’t function as a city if their pensions are impaired.”

“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.

Could Detroit-Style Cuts Come to California?

Pension benefits, once thought safe, now stand on shakier footing than they ever have. Detroit’s citizens live in a state where pensions are protected by the Constitution, but that didn’t matter when a bankruptcy judge ruled that the city could cut worker pensions as part of its bankruptcy restructuring plan.

California workers are now wondering what this all means for them—particularly the workers in the bankrupt cities of Stockton and San Bernardino. The state heavily protects its pension benefits, present and future.

Still, the question on everyone’s mind is: Could Detroit-style pension cuts come to California? Ed Mendel explored that question in a post today on CalPensions:

U.S. Bankruptcy Judge Steven Rhodes, acting earlier than expected, ruled last December that Detroit pensions can be cut, even though the Michigan constitution says pensions are a “contractual obligation” that can’t be “diminished or impaired.”

The ruling that federal bankruptcy law allowing contract impairment overrides state law was appealed by unions. But the early ruling, along with potential loss of “grand bargain” financial aid, may have added to fear of deep pension cuts, influencing the vote.

A cut of 4.5 percent in active and retired general worker pensions and the elimination of cost-of-living adjustments was approved by 73 percent of voters. Leaving police and firefighter pensions intact but trimming their COLAs from 2.25 to 1 percent was approved by 82 percent.

In a brief supporting the appeal of Judge Rhodes’ ruling, CalPERS argued, among other things, that Detroit has a city-run plan and that an “arm of the state” like CalPERS cannot under federal bankruptcy law be impaired in a municipal bankruptcy.

The judge handling the Stockton case, U.S. Bankruptcy Judge Christopher Klein, has said one of his options is ruling on the general issue of whether CalPERS pensions can be cut without necessarily finding that Stockton pensions should be cut.

CalPERS filed the brief in question shortly after the Detroit ruling. The premise of CalPERS argument was that the Detroit ruling didn’t apply to them because Detroit is a city, while CalPERS operates on the state level.

But as Mendel points out, there are a few key similarities between Detroit‘s bankruptcy and those of California. From CalPensions:

Although differing on pensions, the Detroit and Stockton plans to exit bankruptcy are similar on retiree health care. Detroit announced last week that a 90 percent cut in retiree health care was approved by 88 percent of voters.

Judge Klein ruled in 2012 that retiree health care can be cut in bankruptcy, acknowledging the result may be “tragic hardships” for some. A Stockton retiree health care debt of $544 million was reduced to a one-time payment of $5.1 million.

Another similarity is that the Detroit and Stockton “plans of adjustment” to cut debt and exit bankruptcy face challenges from bondholders. Making little or no reduction in massive pension debt, but deep cuts in bond payments, is said to be unfair.

What happens in California will have a ripple effect across the country as cities nationwide are increasingly weighing the prospect of going through municipal bankruptcy proceedings. The judges presiding over these cases will be wading in uncharted waters—and their word will be law. Pension360 will be following subsequent developments closely.