With harsh words for CalPERS and an angry bondholder, a U.S. bankruptcy judge has put into writing his pivotal rulings on the sanctity of public pensions in the Stockton bankruptcy case.
U.S. Bankruptcy Judge Christopher Klein of Sacramento late Wednesday issued a 54-page written version of two groundbreaking decisions he made in the Stockton case last October.
In the first, Klein said Stockton had the legal authority to break its contract with the California Public Employees’ Retirement System and scale back its pension plan. In the second, the judge decided to approve Stockton’s reorganization plan even though it kept the pensions fully intact.
“This court is persuaded that no better plan is likely under the circumstances,” Klein wrote, giving his nod to Stockton’s decision.
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While the written opinion is essentially a rehash of the October rulings, it includes some scolding of CalPERS and its leading antagonist in the case, the Franklin Templeton investment firm of San Mateo.
Franklin, angered that it was getting just 12 cents on the dollar for a $36 million loan to the city, launched a lengthy court fight against the city’s decision to pay CalPERS in full. CalPERS argued that government pensions are untouchable.
Klein had little sympathy for CalPERS, calling its legal defenses faulty. He wrote that the pension fund “bullied its way about in this case with an iron fist.”
But the judge also was disdainful of Franklin, which he said rejected an offer by the city to increase its payments. While Franklin will now lose $32 million, he said that’s small change compared to the $550 million Stockton retirees lost when the city ended its retiree health care plan.
Klein wrote that Franklin’s payout is “unfortunate,” but it reflects “the bargain that Franklin made and the risk that it undertook” when it loaned money to the city.
In early October, in a ruling that made CalPERS and public employees in California cringe, Klein ruled that Franklin’s legal point was correct: Stockton could treat CalPERS like any other creditor and slash its payments to the big pension fund. But later that month, he gave his blessing to the city’s decision to continue paying its $29 million-a-year CalPERS bill in full.
Franklin is appealing the ruling.
CalPERS had said that under state law, any reduction in payments would have meant severing its contract with the city. The end result would have been a 60 percent reduction in pension benefits, which city officials said would have prompted police, firefighters and other municipal employees to quit in droves.
Klein’s written decision comes as the bankrupt city of San Bernardino wrestles with creditors over the same issue. San Bernardino has decided to pay CalPERS in full, too, but two bond creditors are suing the city.
Call The Bee’s Dale Kasler, (916) 321-1066. Follow him on Twitter @dakasler.