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.

 

Comments (7) Add yours ↓
  1. John Moore

    I understand that the Stockton pension plan contains a 5% per yr. COLA for retirees. If so, the math shows that the City has no chance to recover. Other cities and counties curtailed health insurance costs w/o a Chap 9; so all that was accomplished in the Stockton Chap 9 was to wipe out innocent bond holders.
    The justification given for not modifying pensions was that it would curtail hiring of competent workers. Mr. Deis, opined that only one in a hundred police applicants qualified; but that was just his way of saying that there were 100 certified applicants for each police vacancy. Like San Jose.
    If a city council does not have the guts to modify pensions, don’t spend $34M for a suicide Chapter 9.

    November 3, 2014 Reply
    • SDouglas47

      Just to be clear, I read this before. Some commenter remarked that Stockton has 5% COLA: “No wonder they’re going broke, that’s more than the CPI !!!

      I verified at that time, admittedly only two contracts, but the COLA is MAX 5%.

      COLA is equal to CPI, up to 5%. That’s typical contract language. Mine is max 2%, but I haven’t seen 2% for several years. I believe it’s 1.7% this year, same as Social Security, probably same as Stockton.

      While on the subject, there are also those recent stories about how someone can get a pension and healthcare after working ONE MONTH for the city. The same contracts verified that. ONLY IF the worker transferred from another employer with a reciprocal agreement, and was vested with that employer.

      Again, standard contract language.

      November 4, 2014 Reply
      • SurfPuppy

        While on the subject, there are also those recent stories about how someone can get a pension and healthcare after working ONE MONTH for the city
        ==
        Right. Please post a link to the contract, sounds to me like Dougie is up to his old tricks again (spin, spin again, and the spin some more :) )

        November 4, 2014 Reply
  2. SDouglas47

    ” It’s a plan that gives Franklin Templeton a 1 percent return on $36 million it loaned to the city.”

    “Klein said the city’s debt-cutting “plan of adjustment,” approved yesterday, pays 12 percent of the Franklin debt, not a penny on the dollar. He said the plan pays Franklin $4 million for its collateral, two golf courses and a park.”

    Which is correct? Does anyone care?

    November 3, 2014 Reply
    • SurfPuppy

      “Klein said the city’s debt-cutting “plan of adjustment,” approved yesterday, pays 12 percent of the Franklin debt, not a penny on the dollar
      ==
      No he did not say that. Dougie do you make these lies up in the morning???…or do you just lie because you don’t know what is going on?

      No where did Klein state Franklin was receiving 12%.

      November 4, 2014 Reply
  3. SDouglas47

    “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.”

    CalPERS is not the city’s biggest creditor. They are just the middleman. The “creditor” is the employees, who did not emerge unscathed. They were scathed to the tune of over $700 million.

    November 3, 2014 Reply
  4. SurfPuppy

    CalPERS is not the city’s biggest creditor. They are just the middleman.
    ==
    Actually Dougie that is 100% FALSE

    CalTURDS is the creditor, the employees/retirees are 3rd party beneficiaries.

    November 4, 2014 Reply

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