Stockton bankruptcy: bond insurers vs. CalPERS
Bond insurers arguing that Stockton is ineligible for bankruptcy because it
did not attempt to negotiate a pension debt reduction with CalPERS, among other
failings, may get their day in court in January.
U.S. Bankruptcy Judge Christopher Klein, who is presiding over the case in
Sacramento, said in Berkeley Friday that the opponents of the bankruptcy are in
the “discovery” phase, gathering evidence to support their positions.
“I’ll probably have a trial over that in January,” Klein told a conference on
“California’s Fiscal Crisis” at the UC Berkeley Institute of Governmental
Studies. “If I order relief, then it goes forward. If I don’t order relief, the
case will be dismissed.”
Stockton, which filed for bankruptcy in June, is proposing to get major
savings by eliminating $197.5 million in general fund payments on bonds during
the next 25 years, leaving insurers to make payments preventing losses for
bondholders.
The two insurers backing most of the bonds hired large global law firms and
in August filed opposition to Stockton’s eligibility for bankruptcy. Blocking
eligibility may be the insurers best chance to force a change in the Stockton
plan.
The attorneys for National Public Finance Guarantee argued that municipal
petitions for “Chapter 9” bankruptcy should be viewed with a “jaded eye,” citing
two similar lines from past court rulings.
“Considering the bankruptcy court’s severely limited control over the debtor
once the petition is approved, access to Chapter 9 relief has been designed to
be an intentionally difficult task,” says one of the lines cited by the Winston
& Strawn law firm.
If the judge determines Stockton is eligible for bankruptcy, the city would
negotiate a “plan of adjustment” with creditors to reduce its debts. The court
would have to approve the plan, but the court cannot impose a plan of its
own.
“It’s the court’s obligation to review the plan of adjustment and determine
whether it’s fair and equitable as to all parties,” said Klein.
“There would have to be very extensive litigation for the court to say,
‘Well, this plan doesn’t work,’ and authorize somebody to come back. So it winds
up being an iterative process, and it’s highly negotiated among the
parties.”
Klein said the plan in Vallejo, which emerged from a three-and-a-half year
bankruptcy last November, was a consensus worked out, after “a great number of
bodies on the floor,” by the city and its creditors.
“The only other leverage I have is dismissal,” said Klein. “But if I dismiss
the case there is nothing to stop them from turning around and filing it again.
So that’s the limitation.”
In July, Klein denied
a request by a retiree group to block Stockton’s cuts in retiree health
care. He said the federal bankruptcy law prohibits interference with the
debtor’s political or governmental powers, property and revenues.
There is a widespread view that a series of court rulings mean that pensions
promised state and local government workers on the date of hire are “vested
rights,” protected by contract law, that cannot be cut unless offset by an equal
benefit.
Klein said the U.S. Supreme Court has ruled that a state cannot pass a law
that impairs a contract, but did not bar Congress from doing so. He said the
bankruptcy law is reinforced by the constitutional supremacy of federal law over
state law.
“Bankruptcy is all about impairing contracts,” said Klein.
In the Vallejo bankruptcy, U.S. Bankruptcy Judge Michael McManus reluctantly
overturned an electrical workers union contract. He said dissolving the contract
would trigger the city’s binding arbitration, which could have been done without
bankruptcy.
Stockton officials have said they do not want to cut pensions, fearing a
competitive disadvantage with other government employers, and have told unions
in recent negotiations that their pensions will be protected.
Vallejo officials reportedly considered trying to use bankruptcy to cut
pension debt (as in Stockton, CalPERS was the largest creditor) but did not
after CalPERS privately threatened a long and costly legal battle.
Now the California Public Employees Retirement System has publicly staked
out a legal
position on municipal bankruptcies that was presented to the board on Sept.
12 by the CalPERS general counsel, Peter Mixon.
The main point for CalPERS, which says it is an “arm” of state government,
is not whether labor contracts are overturned but the federal limits on
bankruptcy court power cited by Klein in his retiree health care ruling.
“The relationship between CalPERS and a municipal employer is not a mere
commercial contract between a creditor and a debtor,” said Mixon. “Instead, it
is an aspect of the state’s control over a municipality that is protected from
interference under constitutional principles and federal bankruptcy law.”
Mixon said CalPERS has a “fiduciary” duty to protect benefits and “does not
have the right to ‘forgive’ or reduce employer contributions which are necessary
to sustain the soundness of the system and ensure the payments of promised
benefits.”
Under California law, he said, “statutes preclude an agency from lowering
the benefit formula for existing employees who are members of the system.
CalPERS does not have the right to approve a lower benefit formula for these
members.”
In what may be a response to an argument in a bond insurer filing, Mixon
said state law prevents an employer from terminating its CalPERS relationship
through “rejection” of the contract with CalPERS.
Instead, the employer must follow a termination process that closes its
pension plan and provides for payment of the debts. As a result, the typical
employer would face a much larger pension payment.
The National Public Finance attorneys argued that Stockton could have
terminated its pension plan, transferred the assets and debt to the CalPERS
terminated agency pool and tried to “negotiate reduced contribution rates for
existing and future retirees.”
Attorneys for another bond insurer, Assured Guaranty, said that in addition
to failing to negotiate with CalPERS, Stockton “made no effort to engage in
meaningful negotiations with Assured and certain other creditors” as it targeted
bondholders.
Before defaulting on bonds, which caused Wells Fargo to take over parking
garages and a proposed city hall building, Stockton in February shifted $4.5
million from its deficit-ridden general fund to restricted special funds, said
the Assured filing.
The Assured attorneys from Sidley Austin also said Stockton failed to pursue
$7 million in uncollected parking tickets, explore the sale of nearly 600 pieces
of property, consider various tax increases or seek voter approval of a loan
from restricted city funds.
“The city has the ability to reduce spending and increase revenues outside
of bankruptcy, allowing it to remain solvent,” said the Assured attorneys.
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three
decades, most recently for the San Diego Union-Tribune. More stories are at
http://calpensions.com/ Posted 24 Sep 12