U.S. Bankruptcy Judge Christopher Klein ruled Wednesday
bankruptcy laws give Stockton the power to cut ties with California Public
Employees' Retirement System, or Calpers, which controls city workers'
retirement money as the country's largest public pension fund. Judge Klein said
that the section of the U.S. Bankruptcy Code that allows distressed cities and
companies to break contracts is one of bankruptcy law's core powers.
Payments into pension funds are usually considered
sacrosanct, but Judge Klein is the second judge to rule recently that they may
be cut. In December, the judge overseeing Detroit's bankruptcy case ruled that
such obligations aren't entitled to "extraordinary protection" despite
state constitutional safeguards against benefit cuts. The decision is a blow to
the state's retirement system, which has argued pension payments are guaranteed
by California law and can't be cut. Stockton contributes roughly $30 million a
year to Calpers, which controls retirement money for municipal workers across
California and has assets of roughly $294 billion.
Judge Klein didn't say Wednesday whether Stockton, which has
300,000 residents, can leave bankruptcy with a plan that doesn't cut the city's
pension contributions. He said he would read his decision at an Oct. 30
hearing. Stockton's bankruptcy lawyers said that Judge Klein should approve the
plan, arguing after Wednesday's ruling that city workers have sacrificed
enough.
The city cut its workforce by 30% before filing for
bankruptcy in June 2012. Through a major deal on health care cuts, more than
1,000 workers and retirees who had $538 million in claims against the city
agreed to accept one-time payments worth $5.1 million instead.
Throughout the city's bankruptcy, Stockton lawyers fought
off pressure to make pension cuts to free up money to repay a bondholder's $37
million claim. Two funds managed by Franklin Templeton Investments, which
extended the bonds for the city's fire stations and parks, argued that the
city's long-term projections show that it could afford to repay more than the
city's $4 million offer.
City lawyers argued that the Stockton would have to pay a
$1.6 billion termination fee and that city workers would quickly find other
jobs once the pension contract ends. During Wednesday's hearing, Judge Klein
said Stockton has the option to leave the Calpers pension system and find a
potentially cheaper option with another municipality or the private sector.
Stockton's bankruptcy marked the second-largest financial
failure by a U.S. city and one of several California cities, including San
Bernardino and Vallejo, to seek Chapter 9 protection in recent years due to
mounting pension obligations and the fallout from the financial crisis.
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