Appeal threatens federal court ruling on Stockton bankruptcy

Sacramento Bee Nov. 17, 2014

 

Taking aim again at government pensions, an angry creditor in Stockton’s bankruptcy case is appealing a pivotal court ruling that preserved the city’s retirement plans.

Franklin Templeton Investments filed a notice of appeal this week, challenging the Oct. 30 decision that approved Stockton’s reorganization plan. The plan keeps the pensions fully funded but pays Franklin, which loaned the city $36 million during better economic times, just 12 cents on the dollar.

The case in U.S. Bankruptcy Court in Sacramento has been a major legal test of the sanctity of public pensions in California. City officials and CalPERS, which runs the Stockton retirement program, fought hard to keep their relationship intact in the face of the challenge from Franklin. Stockton pays CalPERS about $29 million a year, a figure that is growing.

On Oct. 1, U.S. Bankruptcy Judge Christopher Klein ruled that Stockton had the right to slash its payments to CalPERS, a decision that sent shock waves through the pension industry and had public employee unions scrambling. A month later, though, the judge approved the Stockton reorganization plan even if it leaves its pensions untouched.

City officials and CalPERS had argued that even a partial reduction in Stockton’s pension contributions would have ruinous effects. A complicated mechanism would be set in motion that would have reduced retirement benefits by 60 percent, and Stockton officials predicted a mass exodus by police officers and other city workers.

“It would be no simple task to go back and redo the pensions,” Klein acknowledged.

Franklin argued there was no proof that city workers would quit in droves. Besides, the investment firm said it was simply unfair to pay CalPERS in full while giving Franklin such a meager repayment on its debt.

Rebuffed at the lower court level, Franklin is taking its case to the 9th Circuit Bankruptcy Appellate Panel in Pasadena.

“We intend to continue to fight for a fair and equitable recovery for our fund investors,” said Franklin spokeswoman Stacey Coleman by email. She added that Franklin believes Klein “made many factual and legal errors in concluding that the Stockton plan satisfies the applicable requirements of the Bankruptcy Code.”

Stockton City Manager Kurt Wilson, in a prepared statement, said the appeal isn’t surprising. “We faced an unprecedented level of opposition because we made unprecedented levels of difficult decisions,” he said.

There was no immediate comment from CalPERS.