CalPERS gets dreaded decision: Judge rules Stockton can sever its city pensions

BY DALE KASLER
dkasler@sacbee.com October 1, 2014 Updated 19 minutes ago

The Joan Darrah Promenade Stockton Marina on March 14, 2013.
MANNY CRISOSTOMO — mcrisostomo@sacbee.com


In a potentially groundbreaking decision, a federal bankruptcy judge today struck down the sanctity of government pensions in California, saying the city of Stockton has the right to sever its contract with CalPERS.

The verbal ruling from U.S. Bankruptcy Judge Christopher Klein, two years after Stockton filed for bankruptcy, was the decision CalPERS longed to avoid. For the first time, a judge in California has said a city or county can walk away from its CalPERS obligations, the way a bankrupt retail chain can exit a bad lease at a shopping center.

Whether Stockton would sever its CalPERS contract is another matter. City Manager Kurt Wilson told the Sacramento Bee that there’s no change in the city’s plan to keep paying CalPERS in full and retaining its full pensions. The city’s attorney, Marc Levinson, spent the afternoon trying to convince Klein to approve Stockton’s financial reorganization plan even with the CalPERS relationship left untouched.

CalPERS lawyer Michael Gearin downplayed the impact of Klein’s ruling, saying “those were his comments about a hypothetical city” that wants to rupture its ties with CalPERS.

Much will depend on whether Klein approves Stockton’s plan. A decision could come later today.

The ruling was prompted by a protest from Franklin Templeton Investments, which stands to get just $4 million from a $36 million loan it made to the city during better economic times. Most other creditors from Wall Street are due to receive 50 to 100 cents on the dollar.

Franklin wants Stockton to cut its CalPERS payments, currently $29 million a year, to free up cash for the investment firm. Earlier in the day, the judge showed his leanings by pointedly asking Gearin whether the city’s relationship with CalPERS isn’t just another contract - a business relationship that can be severed in bankruptcy.

“Impairing contractual obligations - that’s what bankruptcy’s all about,” Klein said.

Gearin, however, said the relationship between Stockton and CalPERS is governed by state law that makes it extremely difficult to sever, even in bankruptcy.

The judge later determined that the state law takes a back seat to the federal bankruptcy code and the US Constitution. James Johnston, a lawyer for Franklin, said CalPERS isn’t entitled to “some exalted status under California law.”

CalPERS and the city say chaos would ensue if the city doesn’t pay CalPERS in full. Default would occur, and the city would either have to make a one-time payment of $1.6 billion to keep its pensions intact or watch CalPERS slash pension benefits by 60 percent. The result would be a mass exodus of employees, the city says.

“The city cannot impair pensions and continue to function as a city,” said Stockton lawyer Levinson.n a closely-watched ruling that CalPERS was dreading, a federal bankruptcy judge said Wednesday that protections for Stockton’s city pensions can take a back seat in U.S. bankruptcy cases.

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