Stockton Ruling Could Prompt More CA Cities to Declare Bankruptcy

Stockton Ruling Could Prompt More CA Cities to Declare Bankruptcy

A federal bankruptcy judge’s ruling in the Stockton bankruptcy case Wednesday may trigger more municipal bankruptcies in California and stoke benefit changes at the bargaining table, according to some of the nation’s leading pension watchdogs. 

The decision, by Judge Christopher M. Klein, didn’t order any pension cuts–but it did give city officials the opportunity to make them.

The judge invalidated the argument by the California Public Employees Retirement System (Calpers) that public workers’ pensions have a special status in California and cannot be cut.

“It’s a big defeat for Calpers, which had argued that nothing supersedes California law, which is designed to protect them and they should be paid under all circumstances,” says Steve Malanga, a Senior Fellow at the Manhattan Institute. “What the judge said is federal law is all about breaking contracts.”

“I think it was symbolic,” says Marcia Fritz, a leading pension reformer. “I don’t think Stockton is going to modify pensions, because the city council is solid in not wanting to touch pensions, but I think it could trigger more bankruptcies.”

Fritz says it could also trigger resolve for public sector union leaders to offer preemptive strikes.

“This ruling will likely create some willpower to make modifications at the bargaining table,” she says.

Calpers, the nation’s largest state-run pension system, issued a statement that the “ruling is not legally binding on any of the parties in the Stockton case or as precedent in any other bankruptcy proceeding.

But it might be giving them the shakes.

“It’s a game changer,” says Sean McShea, president of Ryan Labs Asset Management, a New York firm that runs fixed income portfolios for large pension plans. “That was a lever we were not allowed to touch.”

He says of all the players in the game, “the future taxpayer is never represented, and that’s a moral hazard.”

“The judge is doing what the accountants should have done three decades ago,” says Sheila Weinberg, the president of the Chicago’s Truth in Accounting institute. “They’re putting these debts on the same level as the other government debts.”

The Stockton decision is the second federal ruling in the country to indicate pensions aren’t untouchable. A federal bankruptcy judge in Detroit came to a similar conclusion late last year.

Franklin Templeton Investments, a mutual fund company that bought about $36 million of Stockton’s debt, created the stir to cut pensions when Stockton offered to pay it less than a penny on the dollar for its unsecured debt.

Jack Dean, who runs pensionTsunami.com, an aggregate site of daily pension headlines that read like titles for B-horror movies, says the ruling creates opportunity to rethink how California governments are running things

“They keep pointing out the market is better, they’re getting double digit returns,” says Dean. “Then let the taxpayers off the hook and sever the relationship with Calpers. We shouldn’t be backstopping these guys.”

Malanga, who has studied public pension systems for two decades, says the biggest losers in the current pension arrangements are the residents of Stockton and the public sector employees who have been laid off so that the city can meet obligations to retired workers.

“The residents of Stockton have been taken to the cleaners… deprived of services in one of the most violent cities in California.

“There’s no doubt that the efforts by Calpers…to not cut pensions has ironically led to huge layoffs in Stockton, there’s no doubt about that.”

Malanga says if nothing changes, Stockton could still end up in a fiscal death spiral.

“Another bankrupt city, Vallejo, also refused to cut its pension costs. They’re actually in financial trouble again.”

Chris Tobe, author of Kentucky Fried Pensions: Worse Than Detroit, says there’s just no avoiding the pain.

“Everyone is fighting to minimize their own pain, and it doesn’t go away,” he says. “From here on out, it’s all about distribution of pain.”

Heidi Siegmund Cuda is a former investigative producer for Fox 11 News in Los Angeles and the creator and host of the economic series, “Saving the California Dream.” She is currently directing a film on the nation’s public pension crisis.


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