Originally posted at www.calpensions.com

While ruling Stockton eligible for bankruptcy last week, U.S. Bankruptcy Judge Christopher Klein told losing bond insurer attorneys they can continue to pursue a cut in CalPERS debt, mentioning a rollback of pension “spiking.”

Bond insurers opposing Stockton’s eligibility for bankruptcy said they were being unfairly targeted for heavy losses while the largest creditor, the California Public Employees Retirement System, would be paid in full.

The judge said that as the city proposes a “plan of adjustment” to cut debt, bond insurers allied with bond issuers in the “Capital Market Creditors” can make their argument about fairly distributing losses.

Now the self-interest of “Wall Street financiers,” whose losses presumably would be reduced if pension debt is cut, may drive the issue avoided by public officials in the widely watched bankruptcies of several California cities:

Is bankruptcy a way to cut the growing costs of public pensions said by some to be “unsustainable”?

Public pension benefits offered on the date of hire are widely believed to be “vested” rights, protected under contract law by a series of state court decisions, that can only be cut if offset by a new benefit of equal value.

Vallejo officials said they decided not to propose pension cuts after CalPERS threatened a long and costly legal battle. But during a 3½-year bankruptcy a federal judge overturned a Vallejo labor contract, regarded as a precedent-setting first by some.

Stockton officials do not want to cut pensions said to be needed to compete in the job market. In deep cuts since 2008, the city argues, labor lost pay, retirees health care and citizens services, leaving cuts in bond debt as the only fair way to get more savings.

San Bernardino made an emergency bankruptcy filing, avoiding mediation with creditors under a new state law. The city is skipping a $25 million payment to CalPERS this fiscal year, but may want to restructure the payments rather than cut pensions.

Judge Klein sharply criticized bond insurers last week for walking away from Stockton’s mediation with creditors under the new state law when the city refused to consider seeking a reduction in its CalPERS debt.

The judge said under federal bankruptcy law Stockton had no “good faith” obligation to negotiate with CalPERS because the city did not intend to reduce its pension debt.

“This does not mean that there’s not potentially a serious issue involving CalPERS,” the judge said. “But at this point, I do not know what that is. I do not know whether spiked pensions can be reeled back in. There are very complex and difficult questions of law that I could see out there on the horizon.”

The judge said the Capital Market Creditors claim of “unfair discrimination” is not an eligibility question, but by law must be considered when the city proposes a plan of adjustment to reduce its debt before emerging from bankruptcy.

“The city is going to have a difficult time confirming a plan over an objection and claim of unfair discrimination without being able to explain that problem away,” the judge was quoted as saying in a court transcript posted by the city.

“And that problem is probably going to require me to get down into the nitty-gritty of the CalPERS situation. And I, at this point, have no clue how that’s going to come out, but that is the protection (for the creditors),” the judge said.

A problem facing bond insurers who want to cut CalPERS debt is the view, perhaps legally correct, that the pension fund is only a “conduit” or trustee for funds that actually belong to the members of the pension system.

“Referring to CalPERS is like referring to retirees,” the Stockton city manager, Bob Deis, said during a three-day eligibility trial.

If so, negotiations to roll back pensions improperly boosted through various “spiking” methods (usually adding to the final pay on which pension amounts are calculated) would have to include hundreds of scattered retirees.

Another way to cut CalPERS debt is a private-sector pension tool advocated by the watchdog Little Hoover Commission and others: Allow current workers to keep pension amounts already earned, but give them lower pensions for future service.

All new hires will get sharply reduced pensions under Gov. Brown’s reform enacted last year, AB 340. Why should current police officers, for example, continue to earn more generous pensions than new officers who are equally in harm‘s way?

The judge repeatedly has said that he wants a negotiated agreement on a debt-reduction plan. But if talks fail, he also has mentioned what lawyers call a “cram down,” confirming a plan of adjustment opposed by some of the creditors.

Bond insurers did not explore methods for cutting CalPERS debt during the eligibility trial. Now they have an opportunity to bring in actuarial experts and show the judge the “nitty-gritty” of potential CalPERS debt reductions.

Stockton officials acknowledged during the trial that city pay, with automatic increases tied to other cities that were “not reasonable comparisons,” was about 25 percent above the market.

Pay was said to be high not because of “base” salary but due to additional “premium” pay for longevity, education, specialty assignments and other things. A bond insurer attorney cited one of two employees paid more than $400,000 in one year.

“If that person left today under things I put in place, the pay off would have been reduced 75 percent,” said Deis, the city manager.

In a video explaining the bankruptcy quoted by bond attorneys, Councilwoman Kathy Miller said, “Employees made what’s known as pension spiking into an art form” to get “much larger pensions for the rest of their lives.”

When a bond insurer attorney, Guy Neal, asked Deis if the city had tried to recover or “claw back” excessive pay and pensions, Judge Klein asked the attorney if he meant “write a check” for past payments.

“Anything along those lines, your honor,” said Neal.

A skeptical Deis said an attempt to negotiate recovery of excessive pay or pensions would land the city “in front of the PERB (Public Employment Relations Board) for violating the state labor law.”

CalPERS reports show the average pension for safety (police and firefighter) employees who retired during the last five years is much higher in Stockton than in Sacramento, a larger neighboring city that shares the same broadcast television market.

The average pension among 112 Stockton safety employees retired for under five years was $88,091 a year, up from an average of $73,522 for the 65 safety workers retired for five to nine years.

The average pension among 190 Sacramento safety employees retired for under five years was $70,348 a year, up from an average of $68,948 for the 190 safety workers retired for five to nine years.

Why did the average Stockton safety pension increase 20 percent between the two five-year periods?

A city spokeswoman said one factor may be more recent retirees with a higher pay grade. CalPERS, which has an anti-spiking unit, did not respond to a request for a comment on the increase.