Bankruptcy judge's ruling that California city's pensions can be cut could have big impact
A U.S. bankruptcy judge in Sacramento has ruled that the city of Stockton’s retirement-fund obligations to employees can be treated just like other debts in a proposed Chapter 9 reorganization, the Los Angeles Times reports.
In previous bankruptcy cases of other California cities, California Public Employees’ Retirement System (CalPERS) had been successful in keeping the funds from being subject to downward adjustments that might be applied to other creditors. According to the Associated Press, the city’s attorney had argued that Stockton pensioners could take as much as a 60-percent cut if the judge rejects the city’s reorganization plan.
The ruling could affect financially troubled cities, public employees and their pension managers around the country, if relied upon by judges in other jurisdictions. “I would be surprised if other courts did not find the same thing,” said Stetson University law professor Theresa J. Pulley Radwan to the Times.
CalPERS argued in court that the pensions are protected by state law. But U.S. Bankruptcy Judge Christopher Klein, of the Eastern District of California, ruling from the bench said that the state employee-retirement law “is simply invalid in the face of the supremacy clause of the United States Constitution.”
Klein did not yet decide whether to approve Stockton’s bankruptcy plan, which would call for repaying creditors but not cutting pension payments, and the next court date is set for Oct. 30.
“I need to reflect more carefully,” the judge added.
CalPERS attorney Michael Gerin said, “We disagree with his decision, but we don’t think it’s binding in the future.”
At the time Stockton filed for Chapter 9 protection in 2012, it was the largest city in the nation ever to do so; in 2013, Detroit took over that position. The AP reports that the city had reached repayment deals for all its major creditors aside from Franklin Templeton Investments, which brought this suit.
