Stockton’s Pension-Protecting Bankruptcy Plan Approved

By Michael Bathon, Alison Vekshin and Steven Church
Oct 30, 2014 - Bloomberg

Stockton, California, won court approval of its plan to exit bankruptcy by paying bond investors pennies on the dollar while shielding public pensions, in a case watched by other cities facing heavy retiree costs.

“This plan, I’m persuaded, is the best that could be done in terms of restructuring the city’s debts,” U.S. Bankruptcy Judge Christopher Klein said at a hearing today in Sacramento, the state capital.

Bankruptcy lawyers and pension advocates nationwide have been following the case to see whether pensions administered by the California Public Employees’ Retirement System would be protected from cuts.

Klein ruled earlier that Calpers doesn’t deserve special protection, the first time the biggest U.S. public pension fund was found vulnerable to cuts in a bankruptcy. Calpers and public-worker groups decried the decision. A bankruptcy judge in Detroit ruled has against pension funds in a similar situation.

Detroit will learn next week whether it can proceed with a $7 billion debt-cutting plan. The city filed the biggest U.S. municipal bankruptcy last year, listing $18 billion in liabilities. Its trip through court has been faster than Stockton’s, and settlements that would impose cuts on major creditor groups, including retirees and some bondholders, were reached through mediation.

Earlier Ruling

The earlier ruling by Klein gave Stockton the opportunity to end the Calpers contract, which it declined to do because, as the judge said, the workers “would be the real victims.”

Ending the contract with Calpers would have reduced pensions by 60 percent and caused many employees to leave, Marc Levinson, Stockton’s lead bankruptcy attorney, has said. It would have taken years to set up a new pension system, he said.

Meanwhile, workers agreed to “quite substantial” concessions in pay, which has an indirect effect on pensions, Klein said.

“The city has made a smart decision to protect pensions and find a reasonable path forward to a more fiscally sustainable future,” Calpers Chief Executive Officer Anne Stausboll said today in a statement. “We will continue to champion the integrity and soundness of public pensions.”

Hands Tied

Dan Pellissier, president of Sacramento-based California Pension Reform, said Stockton is going forward with “one hand tied behind its back” by choosing not to reduce its pension burden.

“Pension obligations have driven many government agencies toward financial insolvency, and Stockton is betting that they can manage their financial future without fixing its unsustainable pension obligations,” he said in a phone interview. “The purpose of bankruptcy is to get a fresh start on your finances.”

Stockton, a city of 298,000 about 80 miles (130 kilometers) east of San Francisco, filed for bankruptcy in 2012 after spending too much on downtown improvement projects and seeing its property-tax revenue plunge in the housing crisis. Creditors filed $1.18 billion in claims.

The major holdout in the case was Franklin Resources Inc. (BEN) The San Mateo, California-based money manager said Calpers shouldn’t be given special treatment.

Under the city’s plan, Calpers will be fully repaid while two Franklin funds will get back only about 1 percent of the unsecured portion of the $36 million they’re owed. Franklin will get full payment on its $4 million secured claim.

“We are obviously disappointed by your ruling and we will evaluate our options,” James O. Johnston, a lawyer for Franklin, told the judge.

Klein concluded his ruling with a word of caution to other financially distressed cities considering filing for creditor protection under Chapter 9 of the Bankruptcy Code, which covers municipalities.

“This is a very expensive case,” he said. “It seems to me that it’s impossible to do Chapter 9 cases without an eight-digit figure.”

Chris Morgan, a director at Standard & Poor’s said, “There’s a direct cost of going into bankruptcy, and there’s the reputational cost that comes along with it,” by setting a city apart from other municipalities.

“It’s really reinforcing our view that bankruptcy is a difficult journey to go on,” he said.

The case is In re Stockton, 12-bk-32118, U.S. Bankruptcy Court, Eastern District of California (Sacramento).