California Judge Protects Pensions in Stockton Ruling

Injured Piggy Bank WIth Crutches

Yesterday, U.S. Bankruptcy Judge Christopher Klein approved Stockton’s reorganization plan over the objections of investment firm Franklin Templeton, which sought repayment at the expense of public pensions. The ruling clarified Judge Klein’s earlier statements that the city could cut its payments to CalPERS, the retirement system that includes Stockton, California’s pensioners. CalPERS is the largest pension system in the US.

However, the city presented a plan to emerge from municipal bankruptcy that would leave the pension contributions untouched.  The ruling represents a major victory for both CalPERS and public pensions nationwide.

“Vegas rules don’t apply here,” Mark Kaufman, currently lead counsel to the Receiver in Harrisburg PA and co-chair of the McKenna Long & Aldridge Municipal Reform & Innovation practice told CivSource in an earlier interview about the municipal bankruptcy ruling in Detroit. “What happens in Stockton doesn’t stay in Stockton, these rulings set precedents for other cities.”

Court observers have seen a number of varied municipal bankruptcy rulings in recent months, as a cities go before the court to deal with rising costs. Public pensions, which are increasingly expensive for cities, often go underfunded due to years of poor contributions. Typically, when a city goes into bankruptcy, these same pensions are the first thing on the chopping block as private sector creditors argue their primacy at the expense of workers.

CalPERS has been an active watcher of many of these proceedings, precisely because Vegas rules don’t apply and because the largest pension system in the US is often a model for what happens elsewhere. When a judge ruled in favor of using pensions to pay private companies in the Detroit case, CalPERS issued the following statement: “the Detroit court failed to recognize the difference between a two-party contract and the unique nature of a state public employee retirement system, which creates a three-way relationship among a public agency, its employees and the retirement system. In California, our members’ vested rights to their pensions are protected by the California constitution, statutes and case-law. {…} The ruling is shortsighted and does not take into account the promises made in exchange for the financial and physical investments that public employees and retirees make in our communities. CalPERS will continue to protect and champion the public employees and retirees who serve California every day.”

The point of a statement like that was a bit of defense ahead of yesterday’s Stockton ruling. Because court cases set precedent, the decision to attack pensions in Detroit could have follow on effects for other municipal bankruptcies. The Stockton ruling which tacks the other way could mitigate the Detroit ruling, and CalPERS statement yesterday reflects that.

“We are pleased that the City of Stockton will emerge from bankruptcy and can now chart a path forward under a plan of adjustment that protects the pension promises made to its public employees. The City of Stockton has always said it values pensions for its current and retired public employees.  The judge recognized that the city’s employees and retirees have already made significant concessions with respect to their pension and health benefits and that further impairing pensions would harm them even more. The City has made a smart decision to protect pensions and find a reasonable path forward to a more fiscally sustainable future. We will continue to champion the integrity and soundness of public pensions – to protect the benefits that were promised to the active and retired public employees who participate in the CalPERS pension plan.”

Financial & physical investments

Both statements highlight another central issue in municipal bankruptcy. Much like the creditors competing for what is left of a municipal pie, pensioners contributed time and effort in addition to their pay to their pension plans. It’s not as if pensions are created and exist in a vacuum. While much gets made of private company contracts, we are left to wonder how well a city can fare without actual firefighters to go in and put out the fire. What about the police officers that show up to crime scenes, or the teachers that that actually do the teaching? None of that can be accomplished by sending in an army of IBM computers, nor do Franklin Templeton’s financial advisors show up to step in when a shooter goes after a school.

In Detroit and Stockton, many of the people who do come to the schools, burning homes, and traffic accidents make salaries in the low-to-mid five figures, much less than high flying management consultants, or bankers. According to the Sacramento Bee, the average pension in Stockton is $24,000 – barely an internship stipend.

These same employees also tend to pay more taxes over their careers, not to mention the unquantifiable contribution of literally taking a bullet or walking into a fire to protect local residents. A firefighter can’t go get an inversion deal. While there aren’t provisions for that kind of contribution in a bankruptcy court, it might be worthwhile to consider the inherent unfairness in asking someone to both take a bullet and then be thrust into uncertainty when they retire.

How can we as a nation expect to maintain quality teachers, police, or first responders when we repeatedly underline how little we value those roles? We’ve already seen the quality decline, much like our national physical infrastructure. Meanwhile, as CivSource recently reported, the same companies that we place above all else in the waterfall often fail to deliver on those contracts on time, or at the initial quoted cost. California has more existing case law on public pensions than a number of other states, still  it might be worthwhile to consider what kinds of contributions communities prioritize in these proceedings.