Oct. 1 (Bloomberg) -- The California Public Employees’ Retirement System doesn’t deserve special protection as a creditor in a municipal bankruptcy, according to the judge overseeing the debt restructuring of Stockton, a case that pits public pension advocates against Wall Street creditors.
The city’s debt-cutting plan would protect Calpers, the $296 billion pension fund, from any cuts while imposing steep reductions on money manager Franklin Resources Inc. Under the proposal, Calpers would be fully repaid while two Franklin funds would get back only about 1 percent of the $36 million they are owed.
U.S. Bankruptcy Judge Christopher Klein, who could rule soon on the city’s plan, cast doubt on Calpers’ treatment at a hearing today in Sacramento, California.
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The state’s public employee retirement law “is simply invalid in face of the U.S. Constitution,” Klein said. Its contracts with cities can be canceled like other agreements that can only be modified in federal court under the U.S. Bankruptcy Code, he said.
Stockton designed its bankruptcy exit plan assuming that Calpers would hold a $1.5 billion lien on city assets if the pension contract was canceled. Without the lien, the bargaining position of Calpers in the case would have been severely weakened.
Unsecured Claims
Klein today said the pension fund’s claims against a city in bankruptcy are unsecured and aren’t superior to debts including unsecured bonds.
Brad Pacheco, a spokesman for Calpers, didn’t immediately return an e-mail seeking comment on the ruling.
Bankruptcy lawyers and public pension advocates have watched Stockton’s case to see whether Calpers would be given deference by Klein, or if the judge would side with San Mateo, California-based Franklin.
Franklin has attacked the bankruptcy plan as unfair because city worker pensions aren’t being reduced, while investors are being forced to take less than they are owed. Franklin has long claimed that Calpers shouldn’t be given any special treatment.
Stockton, a city of 298,000 about 80 miles (130 kilometers) east of San Francisco, filed for bankruptcy in 2012 after spending too much on downtown improvement projects and seeing its property-tax revenue plunge in the housing crisis. Creditors filed $1.18 billion in claims.
Even though the judge concluded that Stockton can cancel the Calpers contract, the city still has a chance to convince him the plan should be approved anyway.
Klein agreed with many of Franklin’s key positions on the treatment of Calpers. He has said previously that if he ruled against Calpers, he may still approve Stockton’s plan.
The case is In re Stockton, 12-bk-32118, U.S. Bankruptcy Court, Eastern District of California (Sacramento).
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