Five Key Points About the Stockton Bankruptcy Ruling and How It Might Affect Your Pension

Posted on October 2, 2014

Many labor representatives will have heard or read media reports about the “ruling” by a federal bankruptcy judge about the City of Stockton bankruptcy plan. In particular, media reports have focused on the idea that the “ruling” permits the City to cut its pension obligations to CalPERS in order to pay greater sums to Wall Street creditors or even to withdraw from CalPERS altogether.Most of the reports—predictably—are overstated.Here are five key points to keep in mind:

1. The judge’s ruling was verbal (i.e., “from the bench” in legal parlance) and is tentative at the moment—meaning it could change or evolve before becoming final.

2. The ruling does not require the reduction or amendment of any pension promises or agreements with CalPERS—yet. The Stockton bankruptcy plan before the judge currently does not propose to withdraw from CalPERS and has no reductions of pension payments owed to CalPERS or proposed reductions in pension benefits. The creditor, Franklin Templeton Investments, sought a ruling that the City’s $1.6 billion in unfunded pension liabilities could be subject to restructuring and reduction to help pay other creditors. The judge has tentatively held that they could be and Stockton could potentially withdraw from CalPERS. It is another issue entirely for the judge to actually order Stockton to withdraw from CalPERS or otherwise reduce its pension obligations and promises. We may be months or years away from the judge ordering the City to draw up a new bankruptcy plan that includes such drastic options.

3. The decision is NOT binding on other courts, although it could become so. It does, however, mark a significant blow to CalPERS’ position that cities’ pension obligations cannot be touched in bankruptcy proceedings. CalPERS’ legal position drew mostly from California statutory law (particularly the California Government Code sections governing the California Public Employees’ Retirement Law), not vested rights laws. Vested rights could become more heavily implicated in the case if a new bankruptcy plan proposes to negatively impact pensions, but that hasn’t happened—yet This will not stop opponents of public employee pensions from overplaying this decision and suggesting that other public entities have a green light to restructure their pension obligations.

4. Remember the context: the City of Stockton only got to this point by declaring bankruptcy. That is a dramatic step that few public entities have taken or will take. There are enormous downsides to declaring bankruptcy. As the economy continues to recover, the chance of additional public entities exploring bankruptcy is probably lessening, not increasing. This ruling will not change that.

5. Finally, we expect CalPERS to aggressively challenge this ruling if/when it becomes final. The issue is likely to be appealed at least to the federal Ninth Circuit Court of Appeals and perhaps to the United States Supreme Court. In other words, it could take years for these issues to be finally and fully resolved.

We will be closely monitoring this decision for any further developments that potentially impact the pension rights of you and your members.

By Gregg Adam | gadam@cbmlaw.com