| SACRAMENTO, Calif.
SACRAMENTO, Calif. May 13 The judge presiding
over Stockton, California's bankruptcy case on Tuesday said he
will question officials from Calpers to determine whether the
nation's largest pension fund can be forced to take losses in
the case along with other creditors.
Describing the thorny question of whether the California
Public Employees' Retirement System should remain whole while
other creditors absorb steep losses as a "festering sore," U.S.
Bankruptcy Court Judge Christopher Klein said he needed to
consider alternatives for the matter. Calpers contends its
protected status is guaranteed under law, and Stockton, which
declared bankruptcy nearly two years ago, has not tried to
impose any losses on the $285.2 billion pension fund.
"We have a festering sore here. We got to get in there and
excise it and figure out what the story is. Maybe Calpers is
correct, maybe not," Klein said, in a dramatic turn in a trial
that began on Monday.
A decision that Calpers could be impaired has wide-ranging
implications for public employee pensions across the country and
comes as a handful of distressed cities battle their way through
insolvency proceedings. In December, U.S. Bankruptcy Court Judge
Steven Rhodes ruled Detroit may legally reduce public pension
benefits, despite Michigan's constitutional protection of public
pensions. In southern California, the city of San Bernardino is
currently in mediation with Calpers.
The attorney for Calpers, Michael Gearin, suggested the
court should not consider plans other than the one presented by
the city, which left pensions untouched.
"There is a bit of the cart before the horse here," said
Gearin. "What we are in jeopardy of is embroiling the city in a
messy problem that the city does not want to be embroiled in."
But Judge Klein said he would be rubber stamping the city's
proposal if he did not consider the alternatives.
Stockton has avoided impairing Calpers, fearing a $1.6
billion termination fee, and "the real and palpable belief that
if we take on pensions, we lose employees," said Stockton
attorney Marc Levinson.
In the second day of trial to determine if Stockton can exit
bankruptcy, proceedings mainly centered around the city's
holdout creditor, two funds managed by Franklin Templeton
Investments, which is poised to receive less than a penny on the
dollar under the city's plan.
Attorneys for Franklin pressed its case that it is being
treated unfairly. They refuted the testimony of Stockton
Economic Development Advisor Val Toppenberg, who said the golf
courses and ice arena it built with money raised from Franklin's
$35 million bonds are worthless. Toppenberg conceded the city
had reached that conclusion without the assistance of
"I was able to subtract zero from zero," said Toppenberg,
noting that the properties have operated at an aggregate loss
for the last eight years.
Franklin highlighted that the city is planning to use public
facility fees, revenue that could be used to pay back Franklin's
bonds, on other projects and, in part, to pay its bankruptcy
"There is room for the city to pay Franklin a heck of a lot
more than a penny on the dollar," said James Johnston, attorney
The trial is scheduled to last through Thursday, but
Stockton could remain in Chapter 9 protection if the judge does
not find the city's plan to exit bankruptcy is fair and
(Reporting by Robin Respaut; Editing by Lisa Shumaker)