The city of Stockton will have to prove at trial whether it's eligible to file for bankruptcy - setting the stage for a high-stakes decision with huge implications for city services, employees, creditors and CalPERS.
The struggling city filed for bankruptcy last summer, but a group of bond creditors - saying the city hasn't slashed enough costs and is favoring CalPERS at the expense of others - is challenging the decision.
U.S. Bankruptcy Judge Christopher Klein today ordered a four-day trial in late March on the city's right to go bankrupt. It will be a "bench" trial without a jury.
If the bond creditors win their point and the city isn't eligible for Chapter 9 bankruptcy, it could even tougher times for Stockton, with steeper budget cuts and other measures. The city contends it has already reduced staffing and cut payroll considerably.
"Bankruptcy is the cure," said the city's lawyer Marc Levinson. "If we're outside of bankruptcy, how do we pay our bills?"
To the anger of the city's bond insurers, who stand to lose millions, Stockton has declined to seek any reduction in the millions it pays CalPERS each year. By contrast, the bankrupt city of San Bernardino stopped making its pension payments to CalPERS last August, although it says it will resume payments in the next fiscal year.
Levinson said Stockton has no choice but to continue paying CalPERS; otherwise, its employees would quit. "There's no alternative to CalPERS," he said.
Stockton has emerged as an important test case for the sanctity of public pension funds like CalPERS. The bond creditors say the bankruptcy laws are unfairly shielding CalPERS from the financial hardships facing other creditors.
The pension fund's general counsel, Peter Mixon, who attended today's hearing, declined to say what would happen to CalPERS if the city isn't allowed to use bankruptcy protection.
"CalPERS is here really to protect the integrity and soundness of the pension system," he said.