SACRAMENTO — The judge in the Stockton, Calif. bankruptcy case has ruled that a city in Chapter 9 bankruptcy has the power to adjust California Public Employees' Retirement System pensions.
"California's Public Employee Retirement law is invalid in the face of the supremacy clause of the U.S. constitution," U.S. Bankruptcy Judge Christopher Klein said Wednesday during a hearing on Stockton's proposed plan of confirmation to exit bankruptcy. "It's flat out invalid."
Wednesday's hearing was the third extra day of proceedings following a four-day trial in May. When it concluded, Klein said he was still "not in a position" to rule on the confirmation plan.
The hearings have focused on arguments between Stockton and Franklin Advisers, the only creditor with which Stockton has not reached agreement on its plan.
Franklin, which stands to take a 99% loss on $35 million of Stockton bonds under the city's proposed plan, has argued that it is unfair to offer the firm only a 1% recovery rate when the city is proposing not to impair CalPERS in any way.
While Klein had not been asked to decide whether pension obligations could be impaired in this case, he said that it would be very difficult to rule on Franklin's objection without understanding alternatives.
"The city's contract with CalPERS could be rejected under [federal bankruptcy code] notwithstanding the California legislature saying otherwise," Klein said.
"California legislature only has the authority to specify whether the Chapter 9 gate can be opened and under what conditions," he said. "What happens after the city passes through the gate is specified in U.S. bankruptcy code."
The ruling follows a similar opinion in the city of Detroit's case, in which the judge decided that pension obligations could be impaired, along with those from other creditors.
Klein on Wednesday also ruled that the $1.6 billion fee that CalPERS said it would charge Stockton if it terminated participation in the pension plan could be avoided in a Chapter 9 case because "in reality, it could only occur upon the insolvency of a municipality."
CalPERS attorney Michael Gearin said Klein's comments on not binding on other municipal bankruptcy cases.
"It's not precedent-setting," Gearin said following the judge's decision. "His comments are about a hypothetical situation. We think cities in California will likely retain their relationships with CalPERS."
He also said that, as far as he knew, the city was still not planning to change its treatment of pension obligations under its plan.
Whether they will be adjusted in the Stockton case is not yet determined. Following the pension decision, attorneys for Stockton and Franklin continued to make the case for whether or not the city's plan should be approved.
At the end of the day, however, Klein did not give a final decision, and set another court date for Oct. 30.
