A federal judge ruled last week that Stockton’s CalPERS pensions can be cut in bankruptcy. But Stockton does not want to cut pensions, and the lone holdout creditor says it can be paid without cutting pensions.
U.S. Bankruptcy Judge Christopher Klein may have clarified the legal issue of whether CalPERS pensions, widely regarded as untouchable, can be cut if any of the 1,581 local governments in the giant system take the drastic step of bankruptcy.
As CalPERS quickly pointed out in a news release, if the ruling is not put into effect, moved from theory to practice, it’s “not legally binding on any of the parties in the Stockton case or as precedent in any other bankruptcy proceeding.”
The judge is set to rule Oct. 30 on the Stockton “plan of adjustment” to cut debt and emerge from the bankruptcy filed in June 2012. The city has negotiated agreements with all major creditors, except two Franklin bond funds still owed $32 million.
Klein has said he can only confirm or deny the plan, not tell the city how to spend its money. And in a municipal bankruptcy only the city can propose a plan of adjustment, not creditors as in a private-sector bankruptcy.
An issue previously raised, but not much mentioned last week, is whether the Stockton plan cuts enough debt to restore the city’s solvency and avoid a lapse back into a second bankruptcy.
Last November Klein rejected a Franklin argument that the Stockton exit plan failed to disclose enough detail about creditor settlements. But he did say the 30-year plan should cite the “renewal risk” of a ¾-cent sales tax approved by voters that month.
“If I thought there was going to have to be another Chapter 9 (bankruptcy) case in 10 years, I probably would not confirm the plan,” Klein said. “I’m not sure any judge would.”
Last March Klein said he had seen news reports that Vallejo, which emerged from a 3½-year bankruptcy in November 2011 without cutting pensions, had a large budget deficit and possibly faced a second bankruptcy.
“The court has an independent duty to satisfy itself that the (Stockton) plan is going to work,” Klein said, the Stockton Record newspaper reported. “I’m probably going to have to be persuaded that the plan is going to work.”
A Wall Street credit-rating agency, Moody’s, said in February that without pension relief not only Vallejo, but also Stockton and San Bernardino ( which filed for bankruptcy a month after Stockton) are at risk of returning to insolvency.
Franklin did not argue last week that Stockton must cut pensions to avoid a “Chapter 18,” lawyer jargon for a second Chapter 9 bankruptcy. Instead, an attorney said Franklin wants to be a “partner” and let the “city’s rising tide” of prosperity lift all boats.
“It’s possible for the city to confirm a plan that leaves pensions unimpaired,” said Jim Johnston, a Franklin attorney. “It just has to treat Franklin as a dissenting creditor fairly.”
The Stockton long-range budget forecast issued last April (see chart) shows pensions are a key cost driver. The general fund reserve is expected to stay above a warning level of 5 percent, before climbing over three decades to the goal of 17 percent.
Franklin referred to the long-range forecast, with its sizeable planned reserve, when saying Stockton would not have to cut pensions to pay Franklin. The Stockton general fund spent about $183 million last fiscal year.
The Stockton exit plan shows the city’s contribution to the California Public Employees Retirement System climbing from about 10 percent of the general fund to 18.5 percent by the end of the decade, and staying there most of the following decade.
A Franklin consultant, Charles Moore, said the Stockton pension cost forecast is “unsustainably high.” He said city CalPERS contributions for police and firefighters are expected to reach 57 percent of pay by 2019, well above the peer average of 45 percent.
A Stockton consultant, Kim Nicholl, said the city pension estimate uses a lower earnings forecast, 7.25 percent, than CalPERS, 7.5 percent. To cut retirement costs, she said, the city cut pay, raised worker pension contributions and ended retiree health care.
Stockton argues that pensions are needed to be competitive in the job marketplace, particularly for police. But the city also has acknowledged unusually high pensions, notably in a video by Councilwoman Kathy Miller posted on YouTube.
“In Stockton employees made what’s known as pension ‘spiking’ into an art form, using overtime and ‘add pays’ in their final working years to secure much larger pensions for the rest of their lives,” Miller said.
In the well-produced video posted by the city a few days after the bankruptcy filing, Miller said some Stockton employees “earn more than 25 percent over the statewide job market.”
How high pay in Stockton drives up pensions apparently can be seen by comparing recently retired safety employees (police and firefighter) in Stockton and 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. The average pension among 190 Sacramento safety employees retired for under five years was $70,348.
(The pension amounts are reported in the CalPERS annual valuations for the Stockton and Sacramento safety funds as of June 30, 2011.)
A Stockton Record investigation found in March last year that in 2012 salaries of $100,000 or more were earned by 23 percent of the city’s full-time workers, down from about 30 percent two years earlier.
A police chief retired in 2011 with earnings for the year of $413,836, inflated by cashing in unused vacation and sick leave. A community development director retired and then came back on special assignment, earning $436,086 for the year.
After the judge ruled on CalPERS pension cuts last week, attorneys for Franklin and Stockton sparred over whether Stockton had considered alternatives to remaining in the giant pension system.
Johnston, the Franklin attorney, said the Stockton consultant, Nicholl, had not considered using the savings from cutting the pensions of current and retired Stockton employees to finance a CalPERS alternative that would retain and attract employees.
“It just didn’t do the analysis,” he said of the city.
Marc Levinson, the Stockton attorney, said Johnston’s remarks were “offensive” because Nicholl did analyze alternatives to remaining in CalPERS and found that none of them worked.
He said Franklin paid Moore more than $500,000 but “didn’t go out and have an expert come up with a pension alternative.”