SAN FRANCISCO - If pension obligations are impaired in the Stockton, Calif. bankruptcy case, state lawmakers could respond by closing the door to bankruptcy for California municipalities, State Treasurer Bill Lockyer predicted Wednesday.
"As a lawyer and a policymaker, I have a different view about the fundamental issues of a state-run pension system and whether it's even subject to jurisdiction of a bankruptcy court in this circumstance," he said during his keynote address at the California Debt and Investment Advisory Committee event preceding The Bond Buyer's California Public Finance Conference in San Diego.
U.S. Bankruptcy Judge Klein gave an oral ruling last week during a hearing on Stockton's proposed plan to exit bankruptcy that the city's California Public employees' Retirement System pensions can be adjusted in Chapter 9 bankruptcy.
The city had not proposed to impair its obligations under its plan, and has not indicated that it plans to do so following the judge's decision.
Lockyer said that depending on what happens in the bankruptcy case, which is set to pick up again on Oct. 30, there could be major political consequences.
"If it looks like bankruptcy judges in California are going to be activists in this domain, I wouldn't be very surprised to see a coalition of teachers, nurses, firefighters, law enforcement people, district attorneys—and the list goes on—all lobby to the legislature to change the rules so that no municipality can bring a bankruptcy action in a Chapter 9 proceeding," Lockyer said.
He cited the judge's statements during the hearing regarding state and federal jurisdiction in a Chapter 9 proceeding. Klein had said that a state legislature can open the door to bankruptcy, but what happens after a municipality goes through that door is specified in U.S. bankruptcy code.
"Well, the state legislature can close that door," Lockyer said.
The treasurer also guessed that the judge will not likely want to continue to "pick at this particular Stockton scab."
The CDIAC keynote address was Lockyer's last, as his term comes to an end in Jan. 2015. Lockyer previously announced that he will work for law firm Brown Rudnick LLP.
In his address, the treasurer highlighted the state's financial improvements during his tenure, which began just before the financial downturn. The turning points were the passage of Proposition 25 in 2010 to lower the threshold for budgetary approval to simple majority and Proposition 30 in 2012 to increase sales and income taxes.
Lockyer also cited the state's savings of about $1.7 billion in debt service payments from refinancings since 2011.