Stockton Facing May 12th Trial to Invalidate Public Pension

Stockton Facing May 12th Trial to Invalidate Public Pension

With Franklin Tax-Free Income going to court on May 12th to invalidate the pension for making Stockton, California, insolvent, all unfunded public pensions in California may be at risk of being invalidated by the court.

In the corporate bankruptcy business, turnaround managers always worry about their restructuring efforts failing years later and the client being forced to file a Chapter 22 (Chapter 11 bankruptcy twice). But there has been no such concern in the city of Stockton’s municipal bankruptcy reorganization. The city’s fathers sucked up to unions with a huge pension spike, the city was forced into bankruptcy for missing payroll, and now the city is demanding that Franklin’s mutual fund holders take a 97.5% haircut to make spiked public pension benefits 100% money-good.

There have been 8 General-Purpose Local Government Bankruptcy Filings since 2010 under Chapter 9 of the U.S. Federal Bankruptcy Code, including Stockton, CA; San Bernardino, CA; Town of Mammoth Lakes, CA (dismissed); Detroit, MI; Jefferson County, AL; Harrisburg, PA (dismissed); Central Falls, RI; and Boise County, ID (dismissed). At least California is number one at something!

When the city of Stockton declared Chapter 9 municipal bankruptcy in 2012, they had accumulated nearly $1 billion in debt for questionable civic improvements and offered the most generous healthcare benefits in the state, including coverage for life for all retirees and a dependent, no matter how long they had worked for the city.

But the issue that broke Stockton’s back was missing their $29 million annual payment to California Public Employees’ Retirement System (CalPERS) and $7 million repayment of previous pension borrowings, together equaling 21% of its $168 million in total general-fund spending. Two years earlier in March 2011, it blamed the city’s crumbling finances on “uncontrolled pension, health, and other benefit cost increases.” 

But despite owing almost $1 billion to CalPERS to cover those “uncontrollable pensions,” the city now claims that they need a strong pension plan to retain their workforce.

A dubious example of Stockton’s pension spiking is the pension awarded to former Police Chief Tom Morris, who was recruited in 2008 to supposedly “bring stability to law enforcement.” He lasted eight months, then left the city at age 52 with an annual pension of more than $204,000. Morris is one of the four recent chiefs who held the position for less than three years and then retired with lifetime pensions of 92% of final salaries.

Shortly after Stockton filed for bankruptcy to preserve those pension spikes, U.S. Federal Bankruptcy Judge Christopher Klein ruled in April 2013 that public employee pension obligations are nothing more than a “garden variety creditor.” The ruling was a shock-wave regarding the management of 1.2 million public pensions by CalPERS.

But then CalPERS management has been rather controversial. After running up huge amounts of unpaid debts, California labor leader Charles Valdes filed for bankruptcy in the 1990s–twice. At the same time, he held one of the most influential positions in the American financial system as chairman of the CalPERS Investment Committee that manages $277 billion as the nation’s largest pension fund for government workers. Valdes left the board in 2010, after facing scrutiny for accepting gifts from another former board member, Alfred Villalobos, who is indicted for spending hundreds of thousands of dollars trying to influence how CalPERS invested its assets. When questioned by the FBI about Villalobos, Valdes invoked the Fifth Amendment 126 times.

Stockton seems miffed that Franklin mutual fund holders, having loaned the city $35 million in 2009, are now upset that the city’s reorganization plan pays public pensions in full and repays Franklin only about $94,000. According to the city’s attorney Marc Levinson, “We’d like you to see [Franklin’s offer].” Dismissively, though, he added, “You may say it doesn’t matter to me. It doesn’t impact anything whatsoever.”

Federal Judge Christopher Klein has scheduled a four-day bankruptcy trial that will begin on May 12th to decide if “it doesn’t impact anything whatsoever” if money is owed to mutual fund holders or if it “doesn’t impact anything whatsoever” if spiked public pension plans are paid in full.

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