LOS ANGELES — U.S. Bankruptcy Judge Christopher Klein on Wednesday reiterated that bankruptcy law gave Stockton, Calif. the legal authority to impair pensions, even though the city chose not to.
Klein made the point in a
Municipal bankruptcy became a battleground between bondholders and pensioners and pension funds in the recent Chapter 9 cases of Stockton, Detroit, Central Falls, R.I., and San Bernardino, Calif.
Stockton did not attempt to impair the California Public Employees' Retirement system, but Klein made sure to leave the door open for cities in other municipal bankruptcy cases.
The judge called CalPERS "a bully with an iron fist" and "a glass jaw" in his written ruling, adding that it was doubtful that the pension system even had standing to defend the city's pensions from modification.
He opined that pension contracts entered into by the city, including the pension administration contract, may be rejected pursuant to bankruptcy code.
"The California statute forbidding rejection of a contract with CalPERS in a Chapter 9 case is constitutionally infirm in the face of the exclusive power of Congress to enact uniform laws on the subject of bankruptcy under Article I, Section 8, of the U.S. Constitution - the essence of which laws is the impairment of contracts - and the Supremacy Clause."
He ticked off several more reasons the city could have impaired the pension fund, but he also noted that the city's plan did achieve significant reductions, including lower pensions for new employees and the elimination of $550 million in unfunded health benefits that employees accepted in exchange for preserving existing pensions.
Klein's ruling in October that the pensions could be impaired had municipal market watchers pondering the ripple effect the decision could have should other municipalities end up in bankruptcy court, or whether cities struggling under the brunt of pension obligations would be more likely seek bankruptcy protection.
Franklin Advisors was the lone holdout in Stockton's bankruptcy and in November appealed the ruling approving the adjustment plan that outlines the agreements with creditors and allows the city to exit bankruptcy.
On Jan. 20, Klein rejected Franklin's motion for a stay on the city's bankruptcy exit while it appealed the ruling.
The case still faces the pending appeal before a three-judge U.S. Bankruptcy Appellate Panel of the Ninth Circuit.
Franklin had objected to taking a significant loss on the $35 million of bonds it holds — a recovery rate it estimated amounts to about 1% — when CalPERS remained untouched. Other major creditors settled with the city ahead of the bankruptcy confirmation.
Attorneys for Franklin argued the city should have impaired CalPERS and that its failure to do so meant the plan was not proposed in good faith and that Franklin's unsecured claim should be separately classified to be in a separate, non-accepting class of the plan.
In his written ruling, although Klein said legally the city could have impaired CalPERS, he also notes that "the value given up by retirees who accepted the plan is on the order of ten times the value given up by Franklin."
