Federal Judge Smacks CalPERS on Sanctity of Pensions
Exceptionally good news from California today: A federal judge ruled Calpers claim of “Sanctity of Pensions” is invalid. Today’s ruling went even further than the bankrupt city of Stockton originally sought in court.
For details, please consider the New York Times article In Ruling on California Town’s Bankruptcy, Judge Challenges Sanctity of Pensions.
A federal bankruptcy judge on Wednesday upended the widely held belief that public workers’ pensions have a special status in California that makes them impossible to cut, further chipping away at the idea that pensions are sacrosanct in a municipal bankruptcy. The ruling, which came during a hearing on a plan by the City of Stockton to exit bankruptcy, did not order the city to cut its pension plan or take any specific action. The judge said that he needed more time to reflect on Stockton’s situation and that he would decide Oct. 30 whether the city could emerge from its two-year bankruptcy or whether it still had more work to do. But the decision, by Judge Christopher M. Klein of the Eastern District of California, dealt a blow to California’s giant state-led pension system, known as Calpers, which has been leading efforts to preserve defined-benefit pensions nationwide. Calpers had argued that if Stockton stopped making payments and dropped out of the state pension system, the lien would let it claim $1.6 billion of its assets. But Judge Klein said those statutory powers were suspended once a California city received federal bankruptcy protection. “Why should I take that lien seriously?” he asked a lawyer for Calpers, Michael Gearin. “I may avoid it as a black-letter matter of bankruptcy law,” he said, referring to well-established legal principles. He did not dispute that Stockton would be billed $1.6 billion to leave Calpers and said such a termination fee “can be seen as a golden handcuff.” But in bankruptcy, he said, Stockton could legally refuse to pay the bill because it arose from the city’s contract with Calpers, and contracts are broken routinely in bankruptcy. “The bankruptcy code provides that the lien can be avoided and be treated as an unsecured claim,” Judge Klein said. In court proceedings in July, Judge Klein said it was not clear to him that Calpers was even a creditor. He adjourned the hearings until the city and other parties could brief him on Stockton’s relationship with Calpers.
Bizarre Position of Stockton’s lawyer
One has to wonder just what side Stockton’s lawyer is on.
In oral arguments on Wednesday, Stockton’s lawyer, Marc A. Levinson, said that for Stockton to switch to another retirement plan administered by a different entity would probably take two years, and in the meantime all the city’s workers were likely to quit. Their first choice would be to seek similar jobs in cities that were still part of Calpers, he said, adding that he thought Calpers was a more efficient plan administrator than any other entity Stockton might try.
The idea that the entire city force would quit is lunacy. Moreover, it would be a good thing if they did!
All Stockton need do is submit a bankruptcy plan that stipulates employees lose 100% of their benefits if they quit before some stipulated date. How many would leave? None.
The position of Stockton’s lawyer is so bizarre, one wonders if he is attempting to protect his own pension.
Stockton does not need another defined benefit retirement plan. Rather, it needs to eliminate the one it has. And this excellent, common-sense ruling from Judge Klein paves the way.
About the Author: Mike Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education.