Stockton will defend current treatment of pensions at Oct. 1 hearing

By Kali Hays

New York, Sept. 26 – The City of Stockton, Calif., is confident heading into its Oct. 1 hearing at the U.S. Bankruptcy Court for the Eastern District of California to consider pension issues contained in its proposed Chapter 9 plan of adjustment, according to the city’s public information officer Connie Cochran.

Hold-out creditors Franklin High Yield Tax-Free Income Fund and Franklin California High Yield Municipal Fund which have a combined claim of $35 million against Stockton, have consistently objected to treatment of the pensions.

Under the current plan of adjustment, Franklin stands to recover about 1% of its claim.

At a previous plan status hearing on July 8, judge Christopher Klein asked the city for additional briefs with a “more focused analysis” regarding its largest debt, pensions of retired and current city employees to be paid in the proposed plan, according to Cochran.

Judge Klein is considering ruling on whether Stockton’s pension obligations can be impaired during bankruptcy or if the California State Law granting the California Public Employee’ Retirement System (CalPERS) a senior and priming lien upon the termination of a pension plan is legally enforceable during bankruptcy.

According to Stockton, if it were to cut into pensions in order to reduce its debt, its participation in CalPERS would be terminated causing a 60% reduction overall on employee pensions while allowing CalPERS a $1.6 billion lien against the city.

Stockton case

The city intends to present an oral argument at the upcoming hearing defending its decision to not make further pension cuts to reduce its roughly $900 million of debt and said that any court decision on its legal ability to impair pensions is unnecessary.

“Ultimately, whether the city can legally impair pensions is purely an academic question,” Stockton stated in an August brief supporting its plan.

“Stockton has already reduced its pension obligations indirectly, and has imposed drastic cuts to its staffing, compensation and other post-employment benefits. All of these reductions have fallen squarely on the shoulders of the city’s retirees and current employees.”

Cuts already implemented by the city include temporary reductions in the hiring of new employees, hiring new employees at lower wages and the elimination of retiree healthcare.

“The fact is that if Stockton has any hope of retaining its key employees essential to public health and safety such as its sworn police officers, its only option is not to impair its pension obligations,” the brief stated.

Franklin argument

In a September court filing, Franklin argued that Stockton is able to “impair and adjust its massive liability for unfunded pension benefits” but that it “simply chooses not to do so.”

Franklin contends that the city’s treatment of pensions under the proposed plan is unfair and its relationship with CalPERS is “voluntary and subject to termination” in bankruptcy.

Representatives for Franklin could not be reached for comment.

“Whether or not the city’s reasons for preserving the pensions are valid, Bankruptcy Code affords no preferential or exalted position to a municipal debtor’s unfunded pension liabilities, no matter how much the municipality would like to honor those liabilities,” the filing stated.

According to Franklin’s filing, the rules under bankruptcy “prohibit a debtor from picking and choosing among its creditors, paying some in full and then pleading poverty as a justification for paying others virtually nothing.”

“It would be much easier for the city simply to treat Franklin fairly in this reorganization. If, however, the city persists in attempting to cram down a miniscule recovery on Franklin, the city must face up to the fact that it cannot have its cake and eat it too,” the filing stated.

“If the city wishes to cram down Franklin, it must pursue pension alternatives.”

No alternative

In its brief, Stockton said that Franklin’s arguments are “half-hearted” and “hollow” and offer no “feasible alternative” to the current plan of adjustment.

Cochran would not address Franklin’s objections directly and would not “speculate” on the outcome of the upcoming hearing, but expressed conviction in Stockton’s plan.

“The issues are complex, but we are confident in our proposed plan of adjustment and know that it is a plan the city can realistically afford and implement,” Cochran said.

“We're looking forward to October 1, exiting bankruptcy and implementing our plan.”

Stockton filed for bankruptcy on June 28, 2012 under Chapter 9 case number 12-32118.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.