Dan Walters

Dan Walters: Stockton bankruptcy trial has big stakes

Ostensibly, the trial that opened Monday in a federal courtroom was about whether Stockton is eligible to file for bankruptcy.

But the real issue - what one attorney called "the 800-pound gorilla in the room" - is whether public employees' pensions, long thought to be legally untouchable, could be reduced via bankruptcy.

Stockton doesn't want to touch its pension liabilities under bankruptcy - a position vociferously supported by the California Public Employees' Retirement System, the nation's largest pension fund.

But the holders of hundreds of millions of dollars in city bonds, who are objecting to the city's bankruptcy petition, claim that exempting pensions makes them take too big a hit and want Judge Christopher Klein to reject the petition. Rejection presumably would force the city to raise taxes, cut spending further or reduce its pension liabilities.

"This is much like a qualifying heat in a race," Klein observed.

CalPERS dispatched a couple of lawyers to the trial, and one of them told Klein it was to guard against "misinformation." But the judge denied him an opportunity to address the court.

Bondholder attorneys contend that the city's pension obligation is its largest debt, but CalPERS adamantly insists that it's not a debt at all and that payments should be exempt.

While CalPERS backs Stockton, it adamantly opposes San Bernardino's bankruptcy petition because that city stopped making pension fund payments.

The trial's timing is exquisitely ironic, to wit:

It began just two days after the city of Sacramento announced a deal to build a downtown arena for the Kings basketball team by pledging parking revenue for construction bonds. A factor in Stockton's insolvency is that it borrowed and spent heavily on a sports arena and a baseball park that proved to be financial drains. Other cities, such as Fresno, have found themselves in distress for similar reasons.

A Stockton attorney told Klein that the city's insolvency resulted from "years of bad decisions and bad management," but an opposing attorney noted that Stockton continues to pay its employees more than most other local governments, despite its financial woes. And the trial began on the same day that Bay Area news media revealed that Alameda County supervisors had guaranteed the county's top administrator a lifetime income of $423,664 a year.

The trial began just a few days after CalPERS' board tentatively decided to incrementally increase mandatory payments from state and local governments by 50 percent to offset the heavy losses it suffered from losing investments in stocks and real estate, and just days after the California State Teachers' Retirement System, the state's other big pension fund, said it needed $4.5 billion a year more to remain solvent.

Call The Bee's Dan Walters, (916) 321-1195. Back columns, www.sacbee.com/walters. Follow him on Twitter @WaltersBee.