Arguments in the Stockton bankruptcy trial wrapped up Wednesday without an inkling from a judge on whether the city’s flow of pension money to CalPERS can be curtailed to satisfy the demands of another creditor.
After hours of testimony and legal arguments from CalPERS, city officials and creditor Franklin Templeton Investments, U.S. Bankruptcy Judge Christopher Klein ordered up another hearing July 8. He indicated he is likely to rule then on at least certain aspects of the case.
The Stockton bankruptcy has become an epic fight over a huge issue: Are public pensions sacred, as CalPERS says? Or can CalPERS be treated like any other creditor, subject to bankruptcy and possibly see its income reduced, as Franklin argues?
“We know that what happens in this case has consequence,” CalPERS lawyer Michael Gearin told Klein during a 20-minute closing argument. He added that while California law protects the “integrity of the system,” CalPERS isn’t seeking preferential treatment.
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CalPERS “is not here to throw its weight around,” he said. “It’s not here to be the 800-pound gorilla. It’s not here for the purpose of seeking special privileges.”
But Franklin’s lawyer, James Johnston, said CalPERS is seeking just that – to be placed on a pedestal above other creditors. “The city can’t say, ‘We’re going to assume our pension liability in full’ ” and then leave Franklin with a small payout, Johnston said.
Two Franklin bond funds loaned the city $35 million in 2009 to build golf courses, fire stations and other city assets. During negotiations in the months before the city filed for Chapter 9 bankruptcy protection in 2012, the city offered Franklin about 50 cents on the dollar. But when it couldn’t find common ground with the bond company, it reduced its proposed payout to just $350,000, or a penny on the dollar.
Other bond creditors have deals in place to get repaid 50 cents on the dollar or more. Johnston said the city is guilty of “unfairly discriminating” against Franklin.
More importantly, he said the law allows pensions to be “impaired,” in the lingo of bankruptcy. That means the city’s annual contribution to CalPERS, now more than $29 million and growing, can be scaled back legally.
He also argued that the city, as the economy recovers, is doing better financially and could afford to pay Franklin. “This isn’t a case of inability to pay; it’s a case of unwillingness to pay,” Johnston said.
The Stockton case is the second major test of whether public pensions can be sustained when a city goes bankrupt.
The judge overseeing Detroit’s bankruptcy has ruled pensions aren’t sacred; municipal employees and retirees have tentatively agreed to a plan that makes modest cuts in their benefits. CalPERS has said the Detroit ruling doesn’t apply to California, where pensions are constitutionally guaranteed. Nonetheless, the California Public Employees’ Retirement System is watching the Stockton case closely; one of its leading actuaries testified last month.
Stockton officials said they have no choice but to continue paying CalPERS in full, and no choice but to leave Franklin with a penny on the dollar.
“We don’t have the money to pay Franklin now unless we terminate our retirement plan,” said city lawyer Marc Levinson.
Not paying CalPERS would mean “termination” of the city’s pension plan. Existing benefits would be scaled back by around 60 percent, and employees would quit the city, according to testimony by Kim Nicholl, a pension expert from Chicago.
Stockton’s workers would “want to get away from that situation,” she testified.
City officials said such an exodus would crush Stockton just as the city begins to recover financially from the recession. They said retirees have already been stripped of their city-paid health care plan, a move confirmed by the same judge.
“If you attack CalPERS, you are attacking the retirees,” said Margaret Garms, a lawyer for Stockton’s police union.
Johnston, however, dismissed the idea that city employees would flee Stockton. He said there hasn’t been a mass exodus in Detroit even after the bankruptcy judge said pensions could be scaled back in that city.