Stockton bankruptcy Part Two not great, but not terrible
After federal bankruptcy Judge Christopher Klein gave his verbal ruling early this month in the Stockton bankruptcy case, it was the first time in ages that California’s pension reformers had something to celebrate. Klein ruled that pensions can be impaired in a bankruptcy, defying the insistence of the politically powerful California Public Employees’ Retirement System, which argued that pensions can never be reduced even when a city goes belly up. But, sure enough, the sense of hopefulness was short-lived. On Thursday, Klein issued Part Two of his ruling. He approved a Stockton bankruptcy plan that didn’t even try to take on CalPERS. It’s a plan that gives Franklin Templeton a 1 percent return on $36 million it loaned to the city.
Pension reformers were dour. They had figured the judge might not approve the plan, given reports the city will be in fiscal trouble again in four years given that pension liabilities continue to grow. They also thought he might rule it unfair that one creditor would take a huge haircut, while the city’s biggest creditor would emerge unscathed. But the disappointment doesn’t negate the good news from Oct. 1. Klein was the second federal bankruptcy judge to rule that pensions are not sacrosanct. The first one was in Detroit. CalPERS argued that California law is different than Michigan law, and that federal bankruptcy courts are trumped by state constitutions.
That argument is gone. Pensions can be impaired in bankruptcy. The issue is whether cities have the courage to try to take on their payments to CalPERS. “It’s a shame to waste a perfectly good bankruptcy,” said San Joaquin County Taxpayers Association President Dave Renison, in my U-T San Diego column. The city incurred $41 million in costs to go through bankruptcy, but got precious little in return. Taxpayers got stuck with a tax increase. Indeed, most struggling California cities will take that lesson away — it’s far easier to convince a city’s voters to pay higher taxes than it is to take on the public-employee unions and CalPERS.
But the legal door is open for impairing pensions in bankruptcy. Here’s my new piece for American Spectator detailing all the many other doors that have closed. The value of allowing pensions to be reduced in bankruptcy is much broader than most people think. This doesn’t just affect cities that go into bankruptcy. But it provides city officials with some leverage in negotiating with their unions, which always demand more. City officials can say, “If you don’t accept a reasonable reform, we might go into bankruptcy and your members could lose a large portion of their pensions.” It’s important that cities have some option other than tax raising and service cutting.
It would have been nice had Klein sent Stockton city officials back to the drawing board. But all hope is not lost for those who don’t want to see California cities collapse under the weight of their pension promises.