Bond insurers arguing that Stockton is ineligible for bankruptcy because it did not attempt to negotiate a pension debt reduction with CalPERS, among other failings, may get their day in court in January.
U.S. Bankruptcy Judge Christopher Klein, who is presiding over the case in Sacramento, said in Berkeley Friday that the opponents of the bankruptcy are in the “discovery” phase, gathering evidence to support their positions.
“I’ll probably have a trial over that in January,” Klein told a conference on “California’s Fiscal Crisis” at the UC Berkeley Institute of Governmental Studies. “If I order relief, then it goes forward. If I don’t order relief, the case will be dismissed.”
Stockton, which filed for bankruptcy in June, is proposing to get major savings by eliminating $197.5 million in general fund payments on bonds during the next 25 years, leaving insurers to make payments preventing losses for bondholders.
The two insurers backing most of the bonds hired large global law firms and in August filed opposition to Stockton’s eligibility for bankruptcy. Blocking eligibility may be the insurers best chance to force a change in the Stockton plan.
The attorneys for National Public Finance Guarantee argued that municipal petitions for “Chapter 9” bankruptcy should be viewed with a “jaded eye,” citing two similar lines from past court rulings.
“Considering the bankruptcy court’s severely limited control over the debtor once the petition is approved, access to Chapter 9 relief has been designed to be an intentionally difficult task,” says one of the lines cited by the Winston & Strawn law firm.
If the judge determines Stockton is eligible for bankruptcy, the city would negotiate a “plan of adjustment” with creditors to reduce its debts. The court would have to approve the plan, but the court cannot impose a plan of its own.
“It’s the court’s obligation to review the plan of adjustment and determine whether it’s fair and equitable as to all parties,” said Klein.
“There would have to be very extensive litigation for the court to say, ‘Well, this plan doesn’t work,’ and authorize somebody to come back. So it winds up being an iterative process, and it’s highly negotiated among the parties.”
Klein said the plan in Vallejo, which emerged from a three-and-a-half year bankruptcy last November, was a consensus worked out, after “a great number of bodies on the floor,” by the city and its creditors.
“The only other leverage I have is dismissal,” said Klein. “But if I dismiss the case there is nothing to stop them from turning around and filing it again. So that’s the limitation.”
In July, Klein denied a request by a retiree group to block Stockton’s cuts in retiree health care. He said the federal bankruptcy law prohibits interference with the debtor’s political or governmental powers, property and revenues.
There is a widespread view that a series of court rulings mean that pensions promised state and local government workers on the date of hire are “vested rights,” protected by contract law, that cannot be cut unless offset by an equal benefit.
Klein said the U.S. Supreme Court has ruled that a state cannot pass a law that impairs a contract, but did not bar Congress from doing so. He said the bankruptcy law is reinforced by the constitutional supremacy of federal law over state law.
“Bankruptcy is all about impairing contracts,” said Klein.
In the Vallejo bankruptcy, U.S. Bankruptcy Judge Michael McManus reluctantly overturned an electrical workers union contract. He said dissolving the contract would trigger the city’s binding arbitration, which could have been done without bankruptcy.
Stockton officials have said they do not want to cut pensions, fearing a competitive disadvantage with other government employers, and have told unions in recent negotiations that their pensions will be protected.
Vallejo officials reportedly considered trying to use bankruptcy to cut pension debt (as in Stockton, CalPERS was the largest creditor) but did not after CalPERS privately threatened a long and costly legal battle.
Now the California Public Employees Retirement System has publicly staked out a legal position on municipal bankruptcies that was presented to the board on Sept. 12 by the CalPERS general counsel, Peter Mixon.
The main point for CalPERS, which says it is an “arm” of state government, is not whether labor contracts are overturned but the federal limits on bankruptcy court power cited by Klein in his retiree health care ruling.
“The relationship between CalPERS and a municipal employer is not a mere commercial contract between a creditor and a debtor,” said Mixon. “Instead, it is an aspect of the state’s control over a municipality that is protected from interference under constitutional principles and federal bankruptcy law.”
Mixon said CalPERS has a “fiduciary” duty to protect benefits and “does not have the right to ‘forgive’ or reduce employer contributions which are necessary to sustain the soundness of the system and ensure the payments of promised benefits.”
Under California law, he said, “statutes preclude an agency from lowering the benefit formula for existing employees who are members of the system. CalPERS does not have the right to approve a lower benefit formula for these members.”
In what may be a response to an argument in a bond insurer filing, Mixon said state law prevents an employer from terminating its CalPERS relationship through “rejection” of the contract with CalPERS.
Instead, the employer must follow a termination process that closes its pension plan and provides for payment of the debts. As a result, the typical employer would face a much larger pension payment.
The National Public Finance attorneys argued that Stockton could have terminated its pension plan, transferred the assets and debt to the CalPERS terminated agency pool and tried to “negotiate reduced contribution rates for existing and future retirees.”
Attorneys for another bond insurer, Assured Guaranty, said that in addition to failing to negotiate with CalPERS, Stockton “made no effort to engage in meaningful negotiations with Assured and certain other creditors” as it targeted bondholders.
Before defaulting on bonds, which caused Wells Fargo to take over parking garages and a proposed city hall building, Stockton in February shifted $4.5 million from its deficit-ridden general fund to restricted special funds, said the Assured filing.
The Assured attorneys from Sidley Austin also said Stockton failed to pursue $7 million in uncollected parking tickets, explore the sale of nearly 600 pieces of property, consider various tax increases or seek voter approval of a loan from restricted city funds.
“The city has the ability to reduce spending and increase revenues outside of bankruptcy, allowing it to remain solvent,” said the Assured attorneys.
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 24 Sep 12
Calpensions 
September 24, 2012 at 2:27 pm
Quoting …”Mixon said CalPERS has a “fiduciary” duty to protect benefits and “does not have the right to ‘forgive’ or reduce employer contributions which are necessary to sustain the soundness of the system and ensure the payments of promised benefits.””
Did CalPERS ALSO have the right to ADVOCATE for the retroactively increased benefits in SB400 …. by deceiving all the players and cheating Taxpayers stuck with the bill ?
CalPERS entire Board should be tossed and replaced with people with appropriate financial knowledge & skills and whose primary allegiance is to the Taxpayers, NOT the workers.
September 24, 2012 at 5:18 pm
CalPERS’ fiduciary duty is to the members. You have no facts to prove that CalPERS purposely committed fraud on the taxpayers with SB400. All you have is your opinions. Why don’t you turn your ire on those Wall Street titans, who did know they were comitting fraud, TL!
The CalPERS Board Members’ resumes are on the CalPERS site. Pick one that is not qualified, and state your case why that particular member is not qualified to be a CalPERS Board member.
It is all in the hands of the judge. He might dismiss Stockton’s eligibility to claim, Bankruptcy. If the bankruptcy goes forth, the pensions will have first priority for protection–that is what I take away from Mixon’s remarks.
September 24, 2012 at 6:38 pm
Nice editorial from the NY Times on the proposal to establish pooled pensions for those without pensions in California…
Really like their truthful observation that the investment industry hates pooling… because the investment industry makes less money off of it than they do off millions of individual accounts.
September 25, 2012 at 12:14 am
SeeSaw Says: “The CalPERS Board Members’ resumes are on the CalPERS site. Pick one that is not qualified, and state your case why that particular member is not qualified to be a CalPERS Board member.”
CalPERS recently held a special election for a vacant seat on their Board of Directors. I decided to watch the presentations of all seven candidates that were campaigning for one seat in this special election. It was a special election because one of the members was caught up in the CalPERS “Pay to Play” scandal, apparently changed his testimony three times during the investigation, and resigned. He was probably handed a prepared letter of resignation and told to sign it or be terminated. Anyway, I ranked the seven candidates from 1-7, with one being the best candidate from the taxpayers perspective. I ranked Michael Bilbrey 6th. The winner of this seat on the Board of Directors of the worlds largest pension fund, of this Union dominated BOD, is Michael Bilbrey. He is a union guy. Here is his BIO:
Biography and Background:
“Michael Bilbrey is the Bookstore Operations Coordinator at Citrus Community College District in Glendora, Calif. Michael also serves as the 1st Vice President of the California School Employees Association (CSEA), which represents more than 220,000 classified employees in California’s public schools and community colleges. He has earned AA, BA and MBA degrees.
Verdict: NOT QUALIFIED! Apparently Bilbrey wasn’t even the book store manager for the Citrus Community College District in Glendora, Calif. But, in the upside down/backward world of the largest pension fund in the entire world, Bilbrey is qualified. As Don King liked to say, “Only in America.”
I think the Board Presidents qualification was a union member and glazier. SeeSaw, do you know what a glazier does for a living? The definition of glazier is: glass fitter: somebody whose job is to install glass, especially in windows and doors. Are those the qualifications or career path one would expect of a Board President of the largest pension fund in the world. Hint: the answer is NO!
September 25, 2012 at 2:26 am
Sadly, CalPERS enters new territory here. They are elected by their representatives and set their own rates. They claim a right to override judicial actions, and political actions because their claim is that they provide a function of state government. Really an arrogant assertion of power….
September 25, 2012 at 2:30 am
One more point: if CalPERS claims that the only choice is terminating the plan, then they have a duty to disclose the liability that already exists on their “plan closing” assumptions. What would the disclosed liability look like at under 4%? Well, Joe Nation would look like an optimist, and Moody’s Investor Services would look like a wild optimist. How about a little honest accounting from the “member-governed” branch of the state govt?
September 25, 2012 at 5:12 am
I have met Michael Bilbrey in person. He is completely qualified. A long-time public employee, who will be getting his own CalPERS retirement one day. His job is at Citrus college. He is a union activist which every public employee who belongs to a union is allowed to do. His position on the CalPERS Board has no connection with his union activies, which are connected with his employment. He was elected by all the miscellaneous CalPERS members. I don’t really care about what Robert Feckner does for a living at the school where he is employed. A majority of the other 12 members of the Board evidently consider him qualified as President of the Board. I don’t have the time or inclination to vet him for the Presidential position myself. Public employees and members of CalPERs are eligible to run for any one of those six Board positions, as they become vacant. There are seven other positions on that Board that the CalPERS members do not elect. Yes, you are right about the pay to play members–those issues have been aired and dealt with.
September 25, 2012 at 6:10 am
From CalPERS website:
Mr. Feckner is in his 34th year with the Napa Valley Unified School District, where he is currently employed as a glazing specialist. He has also worked as a school bus driver and instructional assistant for special needs students. Mr. Feckner has completed the Trustee’s Masters Program and has completed the CAPPP program in Pension Administration from the International Foundation of Employee Benefit Programs.
September 25, 2012 at 10:04 am
Not necessarily, as Judge Klein’s ruling in a related matter implies. Stockton cut health care for its retirees, and they asked Klein to restore coverage, claiming “vested contractual rights.” But last month, he declared that federal bankruptcy law trumps the state constitution’s contract impairment provision.
September 25, 2012 at 3:26 pm
SeeSaw, I loved the reasons you cited for Michael Bilbrey being …. completely qualified.
(1) A long-time public employee,
(2) who will be getting his own CalPERS retirement one day.
(3) He is a union activist
Boy, that certainly seems to fit the leadership needs of the HUGE CalPERS organization. Perhaps, maybe as “Bookstore Operations Coordinator” he coordinates as many books as CalPERS has Plan Participants. Yup …. he’s in !
September 25, 2012 at 3:42 pm
SeeSaw Curiously, I looked up the requirements for that impressive sounding …”CAPPP program in Pension Administration from the International Foundation of Employee Benefit Programs” that Mr. Feckner completed. The quote below is from their website. Maybe something like a Harvard, Stamford, Wharton, or Princeton MBA in finance rather that 4 days of instruction and passing 2 tests would be the more appropriate qualification for his position on CalPERS’
Board.
“Earn a Certificate in Employee Pensions .. by attending four days of instruction. Each certificate is offered in two parts. You can take the two-day courses independently or consecutively. To earn a CAPPP™ in .. Employee Pensions, attendees are required to pass two take-home exams: one for Part I and one for Part II.”
I couldn’t find anything on that “Trustee’s Masters Program” you quoted. I wanted to see the qualifications and whether it might be one of those “mail-order” MBAs.
September 25, 2012 at 3:42 pm
spension: you are just replacing private workers with govt workers under McKeon’s legislations.
September 25, 2012 at 5:06 pm
Yes, he is qualified. He also has several college degrees includding an MBA in Business Administration. Lets don’t get carried away because the man works for a living.
September 26, 2012 at 1:18 am
All I know is what the bios say–one doesn’t have to be an Actuary to be a Board Member. Must be quite a sight–sitting up there in New Jersey, in your crow’s nest with your binoculars, trying to find someone in CA to discredit.
September 26, 2012 at 1:22 am
Go back and read it again, Silver Price. The Judge ruled that under section 903 of the Chapter 9, Bankruptcy Law, he had no power to tell Stockton it had to restore the health benefits. It is entirely in Stockton’s corner, what priority will be given to the creditors–the Judge does not have the power to decide that.
September 26, 2012 at 7:07 pm
The legal analysis is simple and clear:
UNDER THE SUPREMACY CLAUSE OF THE U.S. CONSTITUTION, FEDERAL LAW PREVAILS OVER ANY CONFLICTING STATE LAW.
Bankruptcy law is federal law.
Contract law is state law.
The California Constitution is state law.
Regarding pension contracts and bankruptcy, there is a clear conflict between bankruptcy law (federal law that allows contracts to be modified or terminated) and contract law (state law). There is also a clear conflict between bankruptcy law (federal law that allows contracts to be modified or terminated) and the California Constitution (state law).
ACCORDINGLY, BANKRUPTCY LAW PREVAILS OVER ANY CONFLICTING PROVISION OF CONTRACT LAW AND THE CALIFORNIA CONSTITUTION.
It’s time to fight firefighters with bankruptcy.
File bankruptcy.
Modify pension contracts (ten cents on the dollar sounds good) or terminate pension contracts (sounds better).
Of course, the filthy rich firefighters’ union will use their war chest of money (filled with union dues funded by salaries and pensions funded by taxpayers) to hire an army of super-expensive lawyers to file appeals and lawsuits asserting absurd academic arguments based on state sovereignty, federalism, perversion of commandeering doctrine, blah, blah, blah, which will further burden our insanely overburdened courts and ultimately fail.
September 27, 2012 at 2:19 am
Except in Chapter 9, Section 903.