Judge to make final ruling on Stockton bankruptcy late October

The judge presiding over the Stockton, California bankruptcy case said on Wednesday that he will wait until late October to make a final ruling over whether the city can exit bankruptcy.

U.S. Bankruptcy Judge Christopher Klein said he was "not in a position to make a decision right now."

Earlier in the day, Klein surprised the courtroom by ruling that the city's contract with the California Public Employees' Retirement System, the world's largest pension fund, could be rejected.

That ruling follows a similar determination in the city of Detroit's bankruptcy case, in which that judge decided that pensions could also be made to absorb losses along with other creditors. In that case, the city's pension plans have agreed to accept benefit reductions, but the Detroit bankruptcy is not yet resolved.

Calpers disagreed with the judge's decision.

"This ruling is not legally binding on any of the parties in the Stockton case or as precedent in any other bankruptcy proceeding and is unnecessary to the decision on confirmation of the City of Stockton's plan of adjustment," Calpers spokeswoman Rosanna Westmoreland said in an emailed statement.

"What's important to keep in mind is what the City of Stockton stated in court today: that they can't function as a city if their pensions are impaired."

Harvey Leiderman, partner at the lawfirm Reed Smith, questioned Klein's ruling, saying it gave cities an "off ramp on the highway" anytime they didn't want to keep their promises to public employees.

"Giving municipalities the option to walk away from their statutory obligations to fund promised benefits means they will never be able to offer services to the public, which is why we have cities and counties," said Leiderman.

Klein has wrestled throughout the trial with the question of whether to confirm the cash-strapped city's restructuring plan without imposing payment reductions to the California Public Employees' Retirement System, as well as other creditors slated to take a haircut.

The judge heard arguments late Wednesday from city officials urging him to approve the plan as submitted, which contained no haircut for Calpers.

The city of Stockton opposes cutting public employee pensions, fearing a $1.6 billion termination fee threatened by Calpers.

But Klein on Wednesday said the threatened fee could be avoided in the Chapter 9 bankruptcy process.

City officials worry that pursuing such a line of restructuring would involve pension benefit reductions of as much as 60 percent, which would prompt many city workers, including police and firefighters, to quit.

City attorney Marc Levinson argued that the city has already unilaterally reduced health benefits to retirees. "They lost their health benefits. They felt pain immediately," Levinson said.

"The city's fear is real. It's palpable," Levinson said.

Stockton filed for bankruptcy over two years ago, making it the largest city in U.S. history to seek Chapter 9 protection until Detroit sought bankruptcy last year.

Stockton's bankruptcy, as well as the Detroit case and another in San Bernardino, California, have been closely watched by the $3.7 trillion U.S. municipal bond market.

Bondholders, public employees, and state and local governments are keenly interested to understand how financially distressed cities handle their debts to Wall Street compared with other creditors, like large pension funds such as Calpers, during Chapter 9 protection.

The Detroit trial, centering on the feasibility and fairness of the proposed restructuring of some $18 billion of city liabilities, began last month and could stretch well into October.

Stockton's case has mainly focused on the collateral of a holdout creditor, two funds managed by Franklin Templeton Investments. In August, the judge ruled Franklin's collateral, which includes two golf courses, a community center and a park, was worth $4.1 million.

Franklin has also argued that pensions should not escape the bankruptcy intact while other creditors are forced to swallow significant losses.

Tags
Stockton, Bankruptcy, Christopher Klein, pensions, Marc Levinson, Wall Street
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