Funds News

Stockton bankruptcy judge calls California pension fund a 'bully'

Feb 5 (Reuters) - The judge overseeing the city of Stockton’s bankruptcy case in California described the country’s largest pension fund as a “bully” yielding an “iron fist,” in a written ruling that reiterated his oral confirmation of the city’s plan to exit Chapter 9.

U.S. Federal Bankruptcy Judge Christopher Klein’s ruling again staked out ground for bankrupt municipalities to alter their workers’ pensions, a contract that the California Public Employees’ Retirement System had ferociously argued could not be touched. Stockton, however, elected to leave its pensions intact.

“CalPERS has bullied its way about in this case with an iron fist insisting that it and the municipal pensions it services are inviolable. The bully may have an iron fist, but it also turns out to have a glass jaw,” wrote Klein, who orally confirmed the city’s plan to exit Chapter 9 protections in October.

In Wednesday’s memorandum, Klein noted that Stockton’s plan achieved “significant net reductions in total compensation,” including lower pensions for new employees and the elimination of up to $550 million in unfunded health benefits. These concessions were accepted by employees in exchange for preserving pensions.

Calpers did not immediately respond to a request for comment.

Stockton, a city of nearly 300,000 located in Northern California, filed for bankruptcy in 2012 after years of fiscal mismanagement and a housing market crash that left it unable to pay its workers, pensioners and bondholders.

Stockton’s case, along with a handful of other municipal bankruptcies over the past few years, have been closely watched by the $3.6 trillion U.S. municipal market to see how creditors, from Wall Street investors to pensioners, would be treated.

The issue of whether public pensions could be modified in municipal bankruptcy was a theme of increasing interest. Calpers argued, as an arm of the state, pensions could not be adjusted. In a pivotal moment, Klein bucked the idea, thereby giving Stockton the green light to alter its workers’ pensions. But the city decided to maintain its contract, and instead reduced other debts.

All of the capital market creditors in Stockton’s case accepted restructured bond debt, but a holdout creditor, Franklin Templeton Investments, objected to the plan, saying the city’s refusal to alter pensions was unfair.

Klein disagreed, writing on Wednesday that “the value given up by retirees” was “ten times the value lost by Franklin,” and “Franklin did not fare as well because it took poor collateral to support its loan.”

Attorneys for Franklin have said they will appeal Klein’s decision.

Editing by Andrew Hay