Government pensions in California remain untouchable, at least for now, after a bankruptcy judge approved Stockton’s plan to repay its creditors Thursday without reducing the city’s pension obligations.
In a major victory for CalPERS and public employees, U.S. Bankruptcy Judge Christopher Klein approved Stockton’s reorganization plan over the objections of a disgruntled investment firm, Franklin Templeton, which wanted more money at the expense of the city’s pension benefits. “This plan, I’m persuaded, is about the best that can be done,” Klein told a packed courtroom in U.S. Bankruptcy Court in Sacramento.
Klein’s ruling came one month after he decided that Stockton could reduce its payments to CalPERS if it wanted to. He said breaking contracts, including the relationship between Stockton and the big pension fund, is the essence of bankruptcy. But on Thursday he confirmed Stockton’s blueprint for exiting bankruptcy even though it keeps pensions intact.
The Stockton case has loomed as a major test of the sanctity of public pensions at a time of rising costs to governments. Klein’s Oct. 1 decision sent major reverberations through the financial world, government circles and public employee unions. Klein acknowledged Thursday that the earlier ruling “undermined” what had been an ironclad assumption: that government pensions are safe and sound, no matter what.
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On Thursday, the judge took stock of the practicalities of Stockton potentially ripping up its contract with CalPERS. Even a partial reduction in payments to CalPERS would have triggered a complicated mechanism that would have slashed pension benefits to Stockton workers by 60 percent. Stockton officials said firefighters, police officers and other municipal employees, who have been quitting city government already, would rush to the exits in even greater numbers, leaving the crime-ridden city essentially ungovernable.
“It would be no simple task to go back and redo the pensions,” the judge said.
Harvey Leiderman, a San Francisco lawyer and pension-law expert not involved in this case, put it this way: “Oct. 1 was an academic exercise. (Thursday) was a reality check.”
CalPERS officials, who have steadfastly fought to preserve pensions, hailed the decision as fair treatment for Stockton’s retirees and current employees, who have already taken cuts in salary and medical coverage. As for the legal status of pensions, they said Thursday’s decision takes a lot of the sting out of the earlier ruling, which was seen as a blow to the nation’s largest public pension fund.
“It makes the (Oct. 1) ruling less significant,” said CalPERS General Counsel Matthew Jacobs, though he added: “It still exists.” He said the California Public Employees’ Retirement System is considering whether it can challenge the earlier ruling.
Organized labor applauded Thursday’s ruling as well. The Oct. 1 decision now “has little meaning for the future of public pensions,” said attorney Teague Paterson, an Oakland attorney who filed briefs in the case on behalf of the Peace Officers Association of California.
Advocates for pension reform, however, said Thursday’s ruling approving the reorganization plan was a mistake because it allows Stockton to exit bankruptcy without dealing realistically with its obligations to CalPERS, which total around $29 million a year.
“Only time will tell if the city of Stockton can continue to provide services without relief from their unsustainable pension obligations,” said Dan Pellissier, a political consultant who has worked to reduce public pension costs. “They’re betting on rosy (financial) assumptions.”
Wall Street also took note of the ruling. Standard & Poor’s Ratings Services said Klein’s decision is a first step “to enable the city to recover its institutional health and standing in the credit markets.”
Stockton officials were thrilled. After years of dealing with financial crisis, and more than two years of bankruptcy, “the city of Stockton can move forward,” Mayor Anthony Silva said as he left the courtroom.
City Manager Kurt Wilson said police officers and other city employees have been leaving Stockton for the past few years because of uncertainty over their pensions and the city’s financial troubles. The city employs 100 fewer police officers than it did before its financial woes began.
He said he believes the exodus will now stop.
“That’s going to be a very big help for us,” Wilson said.
Some employees and retirees, however, remain embittered by the cuts they’ve had to absorb. Retirees, notably, have lost all of their city-paid health care.
“Of course, there’s consolation that the pensions stay intact,” said retired police Sgt. Mark Anderson, 55, who was in the courtroom. Still, he said, “it’s a sad day for Stockton.”
The average Stockton retiree gets a $24,000-a-year pension, although the amount can vary widely. Anderson’s pension is $60,000 a year.
Stockton got into financial trouble by borrowing heavily during the last housing boom, amassing more than $200 million in bond debt to pay for parks, a marina and other amenities. It reached agreement with most of its bond creditors to pay 50 to 100 cents on the dollar.
But it couldn’t make a deal with Franklin Templeton, which lent the city $36 million to build a fire station and more. The city’s plan ends up paying the firm around 12 cents on the dollar, or around $4.3 million.
Franklin Templeton said it should get more money and it was being treated unfairly in light of the city’s refusal to reduce pension contributions to CalPERS. Its lawyer James Johnston argued that CalPERS was seeking “exalted status.”
But Klein, noting the sacrifices already made by workers and retirees, said the dispute boiled down to how they should be treated going forward. If the city were to reduce its pensions to free up cash for Franklin Templeton, workers and retirees would be “the real victims,” the judge said. He added that city employees negotiated pay cuts with the understanding that their pensions would be left alone.
The legal status of public pensions has become a hot issue in two other municipal bankruptcies, San Bernardino’s and Detroit’s.
In Detroit, workers and retirees agreed to modest pension cuts after the judge there ruled pensions could be reduced. San Bernardino suspended its payments to CalPERS for several months after filing for bankruptcy in 2012, but has resumed payments and worked out a settlement with the pension fund earlier this summer. Details of that settlement haven’t been disclosed.
Johnston, the lawyer for Franklin Templeton, said the firm is “disappointed” in Thursday’s ruling. “We will evaluate our next steps,” he said.
Call The Bee’s Dale Kasler, (916) 321-1066. Follow him on Twitter @dakasler.