Time for Stockton to wrestle with CalPERS

April 2, 2013

Muniland turned a very big corner today when U.S. Bankruptcy Court Judge Christopher Klein determined that the insolvent city of Stockton, California had met the criteria for municipal bankruptcy. Stockton became the largest city ever to enter Chapter 9 bankruptcy. The admittance of Stockton to the protection of the court does nothing to address the central question of Stockton’s solvency: what can be done with the massive unfunded pension liability owed to CalPERS, the statewide pension system? Stockton itself has done nothing to address the problem. Judge Klein did have one very important thing to say:

With this statement he mirrored the ruling of the Vallejo, California bankruptcy judge, Michael S. McManus, Jr., who specifically said in his 2009 ruling (page 73, clause 3102.1):

Debtors’ authority to reject executory contracts, as set forth in the Bankruptcy Code, preempts state law by virtue of the supremacy clause, the bankruptcy clause, and the contracts clause. U.S.C.A. Const. Art. 1, § 8, cl. 4; U.S.C.A. Const. Art. 4, § 1 et seq.; U.S.C.A. Const. Art. 6, cl. 2.

As said last August about the McManus ruling:

Translation: Public pensions benefits are construed as a “contract” under California state law, but bankruptcy law is federal and preempts state contract law. A city in Chapter 9 bankruptcy has the ability to lower pension benefits by rejecting their pension contract.

It’s very rare to see a legal basis as firmly rooted as the McManus one, which says the bankrupt party can reject pension contracts. McManus said a bankrupt city can reject contracts based on the foundational pillars of civil law. So why didn’t Stockton public officials negotiate with CalPERS to reduce its liability? Stockton city manager Bob Deis claims that if the city reduces its pension benefits it will be unable to staff its police department. But municipal bankruptcy law (in fact all bankruptcy law) requires that all creditors in a class be treated equally. And the Stockton bankruptcy judge says that CalPERS is a “garden variety” creditor, which would make it pari passu or equal, to bondholders who are slated to take a haircut. And if CalPERS liability is not haircut then bondholders have a right to object to this in court. 

I think Stockton has been getting bad legal advice or has a secret plan for dealing with its enormous liability to CalPERS. Stockton will not return to fiscal solvency unless it reduces this current and future pension liability. The bankruptcy law clearly allows them to reduce it and its financial statements cry out for it. It Stockton is to recover and be made secure again it must wrestle CalPERS now.

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After already extracting money from CalPers program, banks and Wall Street were bailed out to the tune of $17 trillion dollars….all paid for by the US taxpayer. Now we find out that these same institutions knowingly provided financial services to terrorist organizations and drug cartels. Did our government deal with this criminality? NO! They swatted their hands with a feather duster. So, Ms. Cate Long, don’t you think we have bigger fish to fry then going after retirees pensions?

Government and our institutions are broken…and this “Time for Stockton to wrestle with Calpers” article is a good example.

Posted by DrRudyKastner | Report as abusive