Stockton creditor challenges sanctity of public pensions, pulls CalPERS into court

05/14/2014 5:27 PM

10/08/2014 12:05 PM

When the bankrupt city of Stockton unveiled its plan to reorganize its debts last fall, it spread the financial pain among a host of bondholders. CalPERS was spared, and a potentially bloody fight over the sanctity of pension benefits was avoided.

This week, however, the California Public Employees’ Retirement System was involuntarily dragged back into the Stockton bankruptcy case. One bondholder that didn’t agree to Stockton’s plan is challenging the city in court, and demanding to know why CalPERS was able to avoid getting cut.

As a result, a top CalPERS official was summoned Wednesday to testify in the city’s bankruptcy trial in U.S. Bankruptcy Court in Sacramento.

The official, David Lamoureux, said Stockton couldn’t reduce its pension contributions without facing dire consequences: Its pension plan would be terminated, and unless it paid an exit fee of several hundred million dollars, its employees and retirees would likely suffer scaled-back benefits. The rest of the CalPERS system could be affected as well, with state and local agencies conceivably having to contribute funds to pay for the city’s benefit plan.

CalPERS found itself in court, in a proceeding it would have preferred to avoid, because two bond funds managed by the Franklin Templeton challenged the city’s bankruptcy reorganization plan.

Even though the city decided not to try to cut its CalPERS payments, Judge Christopher Klein said he could rule that the pension fund could be treated like other creditors. “That’s what’s going on in my brain,” he said Tuesday, as quoted by the Stockton Record. “This is an opportunity to get to the bottom of it.”

The sanctity of pension benefits remains a raging political and legal issue as cash-stressed cities wrestle with retiree obligations. A judge ruled in Detroit’s bankruptcy, in a landmark decision, that government pensions can be scaled back, although the city later cut a deal with its retirees. The bankrupt city of San Bernardino owes CalPERS millions in overdue payments and has signaled it might try to roll back its pension obligations, but the two sides are in court-supervised mediation.

CalPERS has consistently maintained that pension contributions are sacred, even when the city in question is in financial stress.

“It goes to the fundamental premise of funding a pension plan,” Lamoureux, the pension fund’s deputy chief actuary, said in his court testimony. “We need a constant flow of contributions.”

Failure by Stockton to pay its annual $29 million in annual pension contributions could result in a city’s ouster from the CalPERS system, he said. Unless the city pays hundreds of millions of dollars to exit the system – a fee based on the city’s unfunded pension liabilities – the CalPERS board could reduce benefits to Stockton retirees, based on a pool of funds devoted to municipalities that have left the system.

If that pool ran dry, the rest of the CalPERS system could be tapped to cover Stockton’s benefits.

Last fall, Stockton proposed a wide-ranging plan to restructure $240 million in debt. Several bond firms and bond-insurance firms agreed to significant reductions in the amount they are owed. But Franklin Templeton and the city failed to make an agreement.

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