LOS ANGELES — Stockton is entering the final day today of a scheduled four-day trial to determine if it can emerge from Chapter 9 bankruptcy.
The city is asking U.S Bankruptcy Judge Christopher Klein to approve its plan to reorganize more than $900 million in long-term debt, over the objection of one of its major creditors, Franklin Advisors, Inc.
Stockton filed for bankruptcy protection in June 2012 and received eligibility approval in April 2013.
This week, Judge Klein has heard testimony officials of Stockton, Franklin Advisers, and, most recently, the California Public Employees' Retirement System.
David Lamoureux, CalPERS' deputy chief actuary, gave testimony on Wednesday, saying Stockton couldn't reduce its pension contributions without facing consequences, including a termination fee of several hundred million dollars.
Stockton's bankruptcy exit plan leaves its CalPERS pension obligations untouched, but Franklin's objections have made the pension and health benefits agency a central focus in the case.
Franklin says the city's refusal to confront its pension problem provides no justification for Franklin's "meager" proposed recovery.
Franklin attorney James Johnston, said the investment firm is being offered one cent on the dollar for $35 million of Stockton Public Financing Authority lease revenue bonds issued in 2009.
The bonds were structured as a lease of a city park and two city golf courses that can't be redeveloped.
Franklin said in a previous statement that it is focusing on protecting the value of its fund investors' investments. A spokesperson for the firm said they have no further comment until the trial concludes.
Another major consequence the city would face if it cuts its pension obligations, according to CalPERS' actuary, is that the rest of the CalPERS system could be affected, with state and local agencies possibly having to contribute funds to pay for the city's benefit plan.
"CalPERS' principal responsibility is to maintain the integrity of the California Public employees' Retirement System," he said in a pre-trial testimony declaration. "If a city like Stockton does not timely make its required payments, the actuarial soundness of the fund will be negatively impact."
Even though Stockton is not trying to impair its CalPERS payments, Judge Klein has indicated that he is prepared to rule on whether or not pensions can be impaired. He has in the past rejected a contract impairment argument, noting that the constitutional prohibition against contract impairment does not apply in the bankruptcy arena.
"We have a festering sore here," Klein said of the pension issue on Tuesday, as quoted by Reuters. "We got to get in there and excise it and figure out what the story is. Maybe CalPERS is correct, maybe not."
Whether or not Klein decides to rule on the pension issue remains to be seen. The trial is to wrap up by the end of Thursday May 15, but the judge has flexibility on when he can give his decision.
Marc Levinson, Stockton's bankruptcy attorney and a partner at Orrick, Herrington & Sutcliffe LLP, said last week he expects that the judge would not likely rule at the end of the trial, but may call the parties back the following week to announce his decision.
If Judge Klein grants his approval, then Stockton will be free to implement its plan and emerge from bankruptcy. If he does not approve the plan, Stockton would likely have to revise its plan and go through the confirmation process again.