Pensions may be key to Stockton bankruptcy exit

Bankrupt Stockton says it does not want to cut its biggest debt, pensions promised employees, because the CalPERS plan is needed to be competitive in the job market, particularly for a short-handed police force in the crime-ridden city.

But despite Stockton’s wishes, during a hearing Oct. 1 on Stockton’s “plan of adjustment” to cut debt and emerge from bankruptcy, something else may emerge: a landmark ruling on whether CalPERS pension debt can be cut in bankruptcy.

Early last July, U.S. Bankruptcy Judge Christopher Klein, who has called the unclear status of pension debt in bankruptcy a “festering sore,” asked parties in the Stockton case for legal briefs on the pension issue before the Oct. 1 hearing.

This month the lone major holdout with no negotiated agreement with Stockton, two Franklin bond funds owed $35 million, gave the judge a 64-page brief arguing that CalPERS debt has no special protection in bankruptcy.

Stockton and CalPERS say the pension issue is “academic” and “hypothetical” because the exit plan does not cut pensions. Franklin contends that a ruling on pensions is needed to know whether all creditors are being fairly treated.

“The city’s ability to impair pension liabilities presents a live controversy that the court must resolve as a condition to confirmation of the proposed plan,” said the Franklin brief.

After Stockton filed for bankruptcy in June 2012, two bond insurers owed more than Franklin (Assured Guaranty $164 million and National Public Finance Guarantee $89 million) raised the pension issue while opposing Stockton’s eligibility.

Judge Klein said fair treatment of creditors, a requirement under federal law, would be considered in the exit plan. Stockton negotiated agreements with the two big insurers, a smaller insurer (Ambac $12 million), all unions and a retiree group.

In closed-door mediation, Franklin reportedly rejected a city offer to pay half its debt. The original Stockton plan of adjustment gave Franklin $135,000, a “cram down” or forced reduction in debt that triggered a trial in May.

After Klein set the value of Franklin’s collateral, two golf courses and a park, at $4 million, Stockton agreed to pay Franklin $4 million. Now Franklin wants payment for the remaining unsecured part of the loan.

“Can the court confirm a plan that provides full payment of the city’s massive prepetition liability for unfunded pensions, delivers recoveries ranging from 52 percent to 100 percent for all other material unsecured creditors, yet crams down a sub-1 percent payment on Franklin?” said the Franklin brief. “The answer is no.”

Stockton argues employees have more than their share of financial pain: pay cuts as high as 23 percent, workforce reduced an average of 25 percent, and a retiree health care debt of $545 million eliminated, replaced by a lump-sum payment of $5 million.

With lower pensions for new hires under the governor’s reform, workers paying more toward their own pensions and other changes, Stockton estimates a 30 to 50 percent cut in retirement benefits for current workers, a 50 to 70 percent cut for new hires.

“The city urges the court to confirm the plan and to do so as promptly as possible,” said the Stockton brief. “During the two years of this bankruptcy case, businesses have been reluctant to invest in Stockton and the city has struggled with hiring and retaining personnel.

“Potential employees are hesitant to join the city so long as the future of the city’s pensions is uncertain, while current employees eyeing transfers to other agencies wonder if they need to leave while they have the chance.”

During the trial in May, Klein seemed to suggest a split ruling is possible while reportedly listing several options: “Or I might conclude the CalPERS contract can be impaired, but in this case the decision (by the city) not to do so made sense.”

Port of Stockton (Google Earth)

Port of Stockton (Google Earth)

Stockton argues that cutting pension debt in bankruptcy would terminate the city CalPERS contract, triggering a $1.6 billion payment that would cut pensions 60 percent, cause an exodus of employees, and unwind deals negotiated with unions and creditors.

When a plan is terminated, CalPERS needs a big up-front payment because the obligation to pay the pensions, often running 50 years or more, shifts from the employer to CalPERS, which cannot get more money from the employer if funds fall short.

If the employer cannot make the full termination payment, CalPERS has the brief power, only as the pension obligation is being transferred, to evenly cut the pensions of current workers and retirees to an amount covered by the employer payment.

An expert said during the trial that Stockton could only pay about 40 percent of the current $1.6 billion “unfunded termination liability” calculated by CalPERS for the city’s two pension plans, hence the view that pensions would be cut 60 percent.

Whether a procedure like this can used to cut pensions in bankruptcy is one of the legal issues debated in the briefs requested by Judge Klein. He asked for views about the lien CalPERS has on employer assets to enforce payment of termination costs.

Franklin said CalPERS-sponsored legislation in 1982 imposed the lien after Congress broadened the bankruptcy law “to provide for rejection of collective bargaining agreements and adjustment of resulting claims and other employee obligations.”

To “clarify ambiguities” in the 1982 law, the CalPERS board in April last year approved a staff proposal to sponsor legislation that would “provide CalPERS with a present lien on all assets of a contracting public agency in the amount of all obligations owed to the system.”

The present-lien legislation apparently has not been introduced. Among a half dozen questions raised by the judge is whether a city’s CalPERS contract can be rejected in bankruptcy.

Under state law, said the CalPERS brief, an employer would no longer be eligible for bankruptcy if it attempted to reject its contract. Franklin said that state law is legislation sponsored by CalPERS after the Orange County bankruptcy in 1994.

In the Detroit bankruptcy, a judge ruled that pensions can be cut. Joining in an appeal, CalPERS argued that Detroit has a city-run plan and federal bankruptcy law does not allow an “arm of the state” like CalPERS to be impaired in a municipal bankruptcy.

Last week Detroit reached a tentative agreement with one holdout bond insurer, Syncora, owed about $200 million. Only one major opponent to the Detroit restructuring plan remains, Financial Guaranty Insurance Co., a bond insurer owed about $1 billion.

The Detroit plan cuts many pensions by 4.5 percent and trims or eliminates cost-of-living adjustments. An $816 million “grand bargain” among private donors, the state and the Detroit Institute of Arts reduced pension cuts and saved the city’s art collection.

In Rhode Island last week, state treasurer Gina Raimondo won the Democratic nomination for governor. In 2011 she pushed a pension reform that cut cost-of-living adjustments, raised retirement ages and created a hybrid pension-401(k) plan.

In a small bankrupt city, Central Falls, Rhode Island, population 19,000, retirees voted in 2011 to accept pension cuts of up to 55 percent, reduced for the first five years by a state supplement.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 15 Sep 14

36 Responses to “Pensions may be key to Stockton bankruptcy exit”

  1. Tough Love Says:

    A decision that pensions of CURRENT workers (and perhaps those already retired) CAN be cut would be the BEST possible outcome for CA’s Taxpayers……eminently justifiable and well over-due.

  2. John Moore Says:

    I obtained a one page graph prepared by a Phd in math(CalTech). It shows that so long as the income rate was achieved, a 2%@62 benefit, assuming a 6% income rate, would be feasible at the rates shown. But a 2.5%@55 or a 3%@50 with a 7.5% income rate will build deficits year after year with the same rates. The early eligibility for retirement ages(55 and 50) are obvious deficit builders. Any exit plan that relies on the assumption that deficits will not continue to grow is unrealistic. CaLPERS should show the court the annual rates necessary to continue the pension plans and to amortize the pension deficits over the term of the plan. Then the judge will have the data to determine whether the exit plan is feasible.

  3. SeeSaw Says:

    I think that the key as to whether or not the deficits continue to grow to an unmanageable level, would be the number of retirees in those 50 and 55-year old age groups. The contributions for the 3% at 50 plans are much higher than for other formulas. Since the percentage of retirement among safety personnel at the ages of 50-55 is quite low, I would guess that the remainder of those, respective, plans still in existence with CalPERS are sustainable. For the record, the average rate of return for CalPERS over the previous 20 years is 8.5%.

    You can wish what you wish for all you want, TL. What you suggest is illegal, so it won’t happen.

  4. Tough Love Says:

    Seesaw … predictable comment from someone riding this 80%-90% Taxpayer-funded pension/benefit “pig-fest”.

    And SeeSaw, If the judge rules that pension reductions ARE a legal option in bankruptcy, it certainly can and WILL happen …. and likely with the NEXT CA Bankruptcy.

    Tick Tick Tick Tick ……………..

  5. SDouglas47 Says:

    “pig-fest”?

    Showing off your class and education?

    And it’s 100% taxpayer “funded “. That’s the way this works. Quid pro quo.

  6. Tough Love Says:

    “pig-fest” …. with the workers paying 10-20% of the total cost and the Taxpayers paying the 80-90% balance ….. very accurately describes the state of current Public Sector pensions almost EVERYWHERE !

  7. SDouglas47 Says:

    “And that,” said Mrs. Cooper, “is your OPINION.”

  8. Mike Says:

    SDouglas, Still waiting for your examples of common longevity bonuses in the private sector.

  9. Gopichand Jasoos Says:

    Klein is going to rule that pensions can be cut regardless of whether he approves or denies the plan of adjustment. He’s already hinted that several times, one can always count on the deniers to claim the opposite. The die has already been cast with the Detroit decision and Calpers desperation in filing a brief in the Detroit case is obvious for all to see.

  10. RSpringbok Says:

    CalPERS’ “Arm of the State” argument is quite strong. The obligation of Stockton to pay CalPERS and for CalPERS to administer benefits is not contractual, it is statutory. CalPERS is the ONLY creditor where there is a statutory relationship with the State. A federal BK judge can impair contracts, but he can’t impair state laws. He has absolutely no jurisdiction to do that.

  11. Stuart Mill Says:

    Why not triple the pension benefits then? Where else would this craziness stop if not a Federal bankruptcy ocourt?

  12. RSpringbok Says:

    @Stuart Mill — If a pension system is underfunded, random bankruptcies by municipalities don’t fix the pension system as a whole. Gov. Brown’s pension reform, with its increased employee contributions, reduced benefits and its hard pension cap at $117k, will make CalPERS sustainable. It will take years to get there but it will work eventually. In the meantime there will be some turbulence as some additional localities may go BK, but with time, Brown’s plan will work.

  13. Gopichand Jasoos Says:

    Arm of the state argument is nonsense at best. Brown would not have a need to write a letter to Calpers for reconsidering some of the new 99 ways that Calpers authorized to loot taxpayers if it truly were an arm of the state. Brown’s tokenism to fix Calpers is obvious if one looks beneath the headlines.

  14. SDouglas47 Says:

    A letter reconsidering ONE of 99 salary enhancements approved by the legislature, not “authorized by CalPERS”. There is a disagreement in the interpretation. Not to be solved by a letter from the governor, but by due governmental process.

  15. SDouglas47 Says:

    “Tokenism”

    The Little Hoover Commission suggested twelve changes to the pension system. All were adopted except the one that even the Commission conceded was probably unconstitutional and would result in years of litigation.

  16. Tough Love Says:

    SDouglas47 Says,

    More BS ……….. because you conveniently omitted that the Little Hoover Commission recommended that these pension changes apply to the future service of all CURRENT workers … while the actual changes apply only to NEW workers

    As such, they are financially near-meaningless.

  17. Tough Love Says:

    Documentation of my above comment:

    Here is a link to the Little Hover Commission Report …

    And the following is pasted from the Reports Executive Summary …
    ———————————————————————————–
    The problem, however, cannot be solved without addressing the pension liabilities of current employees. The state and local governments need the authority to restructure future, unearned retirement benefits for their employees. The Legislature should pass legislation giving this explicit authority to state and local government
    agencies. While this legislation may entail the courts having to revisit prior court decisions, failure to seek this authority will prevent the Legislature from having the tools it needs to address the magnitude of the pension shortfall facing state and local governments.

    The situation is dire, and the menu of proposed changes that include
    increasing contributions and introducing a second tier of benefits for new employees will not be enough to reduce unfunded liabilities to
    manageable levels, particularly for county and city pension plans. The only way to manage the growing size of California governments’ growing liabilities is to address the cost of future, unearned benefits to current employees, which at current levels is unsustainable. Employers in the private sector have the ability and the authority to change future, un-accrued benefits for current employees. California public employers require the ability to do the same, to both protect the integrity of California’s public pension systems as well as the broader public good.

    Freezing earned pension benefits and re-setting pension formulas at a more realistic level going forward for current employees would allow governments to reduce their overall liabilities – particularly in public safety budgets. Police officers, firefighters and corrections officers have to be involved in the discussion because they, as a group, are younger, retire earlier and often comprise a larger share of personnel costs at both the state and local level. Public safety pensions cannot be exempted from the discussion because of political inconvenience.

  18. Tough Love Says:

    Ooophs …….

    Here is the link to the full Little Hover C omission Report:

    http://www.lhc.ca.gov/studies/204/Report204.pdf

  19. Mike Says:

    SDouglas47 has no credibility. Ignore his comments and keep posting facts. His comments are self serving, and preaches to those like him.

  20. SeeSaw Says:

    The Little Hoover Commission is a far-right, leaning group of politicians; the majority of its members were appointed by Governor Arnold Swartzeneggar. You are just a member of the choir, TL.

  21. Tough Love Says:

    Mike, Yes, I agree.

    Ever hear of New Cuyama, CA ?

    Looks like their head of the Works Dep’t isn’t one of those “Best & Brightest” Taxpayers pay so much for …

    http://www.beliefnet.com/Entertainment/Galleries/Hilarious-road-signs.aspx?b=1&p=13&utm_campaign=YARPP&utm_medium=paid_distribution&utm_source=YARPP

  22. Tough Love Says:

    SeeSaw, RE LHC Members …

    From the LHC website:

    Commissioners

    The 13 members come to the Commission from all walks of life and from diverse appointment authorities. Five are appointed by the governor, two by the Speaker of the Assembly and two by the Senate Rules Committee. Rounding out the membership are two sitting Senators and two sitting Assemblymembers. By statute no more than five of the nine public members may be from the same party and legislators from each body must be from different parties. Currently there are two vacancies on the Commission.

    Pedro Nava
    Chairman
    Loren Kaye
    Vice Chairman
    Katcho Achadjian
    Assemblymember
    David Beier
    Anthony Cannella
    Senator
    Jack Flanigan

    Don Perata
    Anthony Rendon
    Assemblymember
    Richard Roth
    Senator
    David Schwarz
    Jonathan Shapiro
    Sumi Sousa
    ——————————————————————-

    So who do you think is smarter (a) or (b): ….

    (a) These Commission members or
    (b) A little old lady lady who retired as a CA Public Sector worker a few years ago with (drum roll) ….. a final salary of abut $50K ?

  23. SeeSaw Says:

    No, TL, it was less than that–but fortunately with the help of a few less than 2% COLAS over the years, it has finally reached that point. And I pay half of the take-home for medical insurance premiums. Who is in a contest? They are all politicians–I am an onlooker and a voter who happens to make my domicile in CA. You are just some joker up there in NJ trying to mind our business in CA–I guess you win the prize for biggest dunce.

  24. Tough Love Says:

    SeeSaw,

    The incredibly important business of Public Sector Pension Reform is a NATIONAL one.

    Greed (of Public Sector Unions/workers) knows no borders.

  25. SDouglas47 Says:

    Mike,

    Really?

    I made a comment about longevity pay in the private sector. My father worked for a notoriously ungenerous company in the Midwest producing truck beds. He got a longevity increase after ten years with the company. I worked 37 years for the state of California and all I got was a one time award. At 25 years, I received a gold (plate) wristwatch and a certificate signed by Arnold governor Schwarzenegger.

    You wanted a link. The only conclusive link I found verifying longevity pay in the private sector was this one:

    ” In addition to the pay increases described herein, all employees shall receive a longevity increase of 12cents per hour, payable as follows: employees who have been employed by the Company for more than three years as of April 1, 1975, shall receive said longevity increase on the first anniversary date of their employment following the effective date of this contract, and shall receive a longevity increase thereafter, at three year intervals. ”

    http://openjurist.org/913/f2d/1166/lattimer-stevens-company-v-united-steelworkers-of-america
    …………….
    As it happens, although public sector contracts are very easy to access, private sector contracts and pay practices are much more difficult to verify. The only reason I found the above contract language was because it was quoted in a lawsuit. I did find several articles with offhand references to longevity pay, usually in the context of contract negotiations (UAW, Caterpillar, Teamsters, Airlines,etc.)

    For example:
    ” The new agreement provides for an immediate salary increase, longevity increases, additional paid time off, job security protections, an expansive basing system, and a grievance and arbitration process.”

    http://www.ibt1108.org/mobile/index.cfm?zone=/unionactive/view_page.cfm&page=Press20Releases

    There was no intention to deceive.

  26. SDouglas47 Says:

    TL says:

    ” you conveniently omitted that the Little Hoover Commission recommended that these pension changes apply to the future service of all CURRENT workers …”

    not omitted……

    SDouglas47 said:

    ” All were adopted except the one that even the Commission conceded was probably unconstitutional and would result in years of litigation.”

    That “one” being that the changes apply to future service of current workers. By the time that works its way through the courts, most of the current workers will be gone.

    *note: “current” workers can be interpreted the same as CURRENT workers.

  27. Tough Love Says:

    Like I stated earlier SDouglas47, without ALL of the changes applying to the future service of “CURRENT” workers, they a financially impotent.

  28. SDouglas47 Says:

    In your opinion.

    There’s a rapid turnover in government workers. Only about 20% make it to 30 years or more. The average length of service for retirees is about 20 years, and almost half of government workers don’t even stay long enough to vest in retirement (usually about 5 years.) The LHC report was written in 2011 on two year old data.

    By 2020, there will be more new employees than “current”. It would take much longer than that for any “major reform” to work its way through the courts.

  29. Tough Love Says:

    As you said SDouglas47 … in YOUR (incorrect) opinion.

  30. Mike Says:

    Ah sdoug, Great job!!!!!!!!!! You have smoked me with your current relevant facts. Whoa. DAMN, you are good. I think my grandpa got longevity bonuses in the coal mining industry. He passed on in the mid 70 s, about 19 years after the coal industry bolted Penn.

  31. Tough Love Says:

    Mike, I was wondering how long it took SDouglas47 to dig up that ancient stuff …. quite ridiculous as far as proving his point.

  32. SDouglas47 Says:

    Your grandson can work for Southwest Airlines or Ford today and get better longevity pay than grandpa did.

  33. Mike Says:

    You are amazing sdoug. Wal-Mart gives raises, that is a longevity bonus. I got it figured out. So if you work 45 years, and run out of money in retirement…work at Wal-Mart and pile up those longevity bonuses till judgement day.

  34. SDouglas47 Says:

    We’re trying to understand your emotional obsession with this simple concept, Mike.

    Stuart Mill thought it was “theft” that teachers got a raise after 25 years, and…”There is nor requirement that the teacher do anything than show up for another year.”

    This is usually called a longevity increase and it is not unique to the public sector.

    You want concrete examples, no big deal, although you should be capable of finding them yourself. You seemed somehow slighted with no answer, so I spent a little web time to accommodate you.

    What is a longevity raise?

    ” Employers typically give their employees longevity raises to recognize and reward the length of their tenures. Increases in pay may be given annually; they’re also awarded when employees reach significant employment anniversaries. A longevity raise differs from a merit raise in that a longevity raise is based solely on length of service, while a merit raise is designed to recognize superior job performance.”

    A 2010 Teamster contract is not “ancient stuff”. But if you NEED something more current, try:

    https://www.google.com/url?sa=t&source=web&rct=j&ei=dFwiVPmRGdb8oQSPmIKgCw&url=http://www.local1782.org/preview.pdf&cd=11&ved=0CBsQFjAAOAo&usg=AFQjCNG5kJLO2eLPIhnKRP1m6v2bt9gA3A&sig2=9u1ryLpK4ZztYcyQhwzThQ
    …………
    “What private company does that(longevity pay? Much more common, you are at the top of your range, no more salary increases. Specific examples please.”

    Your sarcasm seems to be obscuring your point, Mike. Do you want MORE specific examples?

  35. Mike Says:

    Thanks for you examples, generally in the private sector unionized areas.

  36. Mike Says:

    Please read “zero to one”. This is the future for our kid’s and grandkids. The kids will question everything, break everything. nothing is a sure thing, social security, medical care…alas your pension. Death. Yup for us… maybe not so much for them. One day, your prescriptions don t get filled, or is a new mixture to modify your cost to society. “Dorothy, we are not in Kansas anymore.”

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