Oct. 30 (Bloomberg) — Stockton, California, won court approval of its plan to exit bankruptcy by paying bond investors pennies on the dollar while fully protecting public-worker pensions, in a case that has been watched by other cities in the state facing heavy retiree costs.
"This plan, I'm persuaded, is the best that could be done in terms of restructuring the city's debts," U.S. Bankruptcy Judge Christopher Klein said at a hearing today in Sacramento, the state capital.
Stockton's bankruptcy pitted public-pension advocates against investors, who stood to recover a fraction of what they're owed for their bonds. Bankruptcy lawyers and pension advocates nationwide followed the case to see whether pensions administered by the California Public Employees' Retirement System would be shielded from cuts.
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This month, Klein rules that Calpers doesn't deserve special protection, the first time the state pension fund was found vulnerable to cuts in a bankruptcy. Calpers and public- worker groups decried the decision. Last year, a bankruptcy court in Detroit ruled against pension funds in a similar situation.
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Detroit will learn next week whether it can proceed with a $7 billion debt-cutting plan. The city filed the biggest U.S. municipal bankruptcy last year, listing $18 billion in liabilities. Its trip through court has been faster than Stockton's, and settlements that impose cuts on major creditor groups, including retirees and some bondholders, were reached through mediation.
Stockton's exit plan leaves the pensions alone. Ending the contract with Calpers would have reduced them by 60 percent and caused many employees to leave, Marc Levinson, Stockton's lead bankruptcy attorney, has said. It would have taken years to set up a new pension system, he said.
The city cut deals with most creditors, including unions and retirees. The holdout was Franklin Resources Inc., which attacked the plan as unfair. The San Mateo, California-based money manager claimed that Calpers shouldn't be given special treatment.
Stockton, a city of 298,000 about 80 miles (130 kilometers) east of San Francisco, filed for bankruptcy 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.
Under the city's plan, Calpers will be fully repaid while two Franklin funds will get back only about 1 percent of the unsecured portion of the $36 million they're owed. Franklin will get full payment on its $4 million secured claim.
The case is In re Stockton, 12-bk-32118, U.S. Bankruptcy Court, Eastern District of California (Sacramento).
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