On the day that Stockton emerged from bankruptcy last week, ending 32 months of debt protection, the final court argument was about the “cram down” imposed on the only creditor that did not cut a deal.

Is Franklin bonds getting a 12 percent payment from Stockton for a $36 million loan or, as the city contends, a 17 percent payment?

The answer depends on whether $2 million of the loan, held in reserve like a “last month’s rent” security deposit, is counted along with a $4 million city payment to Franklin or simply regarded as the bond fund reclaiming its own money.

It’s a minor issue, one Judge Christopher Klein suggested he may resolve by being less specific in his 54-page decision confirming the Stockton plan to exit bankruptcy, which said Franklin recovered about 12 percent of the money owed.

“I’m not surprised people want to put a finer point on the pencil,” the federal bankruptcy judge said.

Larger questions remain, however, from the judge’s first-of-its-kind ruling that CalPERS pensions can be cut in a municipal bankruptcy, even though in this case Stockton chose not to do so.

Will CalPERS appeal the pension ruling or let it stand unchallenged, possibly clouding the sense of security of state and local government employees, encouraging future bankruptcies and giving management leverage in labor negotiations?

And does Stockton’s decision not to cut pensions in bankruptcy risk future insolvency, as Moody’s credit rating service warned a year ago, possibly putting the city on a path to future budget deficits, which Vallejo has faced since its bankruptcy?

Franklin is appealing the judge’s approval of the Stockton exit plan, arguing creditors are treated unfairly because pensions are not cut. It’s not clear whether CalPERS will appeal the judge’s ruling for the opposite reason: that pensions can be cut.

The California Public Employees Retirement System joined a union appeal of a federal judge’s ruling in the Detroit bankruptcy in December 2013 that municipal pensions can be cut in bankruptcy.

CalPERS argued, among other things, that Detroit has a city-run plan and that an “arm of the state” like CalPERS cannot under federal bankruptcy law be impaired in a municipal bankruptcy.

After Judge Klein issued an oral version of his ruling last Oct. 1, an initial CalPERS reaction was there is nothing to appeal, no written ruling or action, just a “hypothetical” from one judge. Klein issued his written ruling on Feb.4.

“While we’re still considering all options, we don’t generally discuss litigation strategy,” a CalPERS spokesman, Brad Pacheco, said last week.

Stockton officials know the city has high pension costs. In a city video posted on YouTube after bankruptcy was filed on June 28, 2012, Councilwoman Kathy Miller said some employees earn 25 percent more than the statewide average.

“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.

But if not for Franklin, there may have been no ruling on the pension issue Klein called a “festering sore.” Stockton did not want to cut pensions. City officials said they are needed to be competitive in the job market, particularly for police.

In a 90-day mediation leading up to Stockton filing bankruptcy on June 28, 2012, Stockton negotiated pay and staff cuts with most of its unions, promising in exchange that pensions would not be cut.

Two bond insurers backing most of the Stockton bonds were the first to raise the issue of whether all creditors are treated fairly, as required by federal law, if most debt is cut except one of the largest, pensions administered by CalPERS.

Assured Guaranty was owed $164 million and National Public Finance Guarantee $89 million. The city negotiated debt-cutting agreements with the two insurers who had strong loan collateral: buildings needed by the city for police and a new city hall.

Franklin’s weak collateral, two golf courses and a park, was not vital to the city and valued by the court at about $4 million. The city paid Franklin $4 million, but the rest of the Franklin debt is in the city’s unsecured loans class with retiree health care.

A retiree vote approving the biggest cut in the Stockton exit plan, with Franklin far outnumbered, set the pattern for paying all creditors in the unsecured loan class. A $545 million long-term retiree health care debt was replaced with a $5 million lump-sum payment.

Applying the same kind of cut to the remaining $32 million owed Franklin resulted in a city payment of about 1 percent. So, being placed in a debtor class with retiree health care is another part of Franklin’s legal objection to the Stockton exit plan.

Franklin reportedly rejected a Stockton offer to pay half its debt. It’s tempting to speculate about “what if” the city, with a bow to the strategy that the last man gets the savings from earlier cuts, had decided to buy off Franklin, perhaps with full payment.

A trial on the “cram down” of Franklin debt and the appeal might have been avoided, city bankruptcy costs projected at $41 million last fall reduced, no pension ruling issued, bankruptcy exited earlier and retiree stress from uncertainty shortened.

A retiree whose anguished face appeared in 2012 beneath a dramatic Stockton Record headline, “BANKRUPT!,” was interviewed by the newspaper last fall.

“I was crying not just for myself, but for the other people who were even more devastated because of the loss of (health) insurance than I was,” Susan Stagnaro told the Record, “and I was feeling betrayed by the city of Stockton.”

Franklin’s pension argument was based on fairness, not ability to pay. “It’s possible for the city to confirm a plan that leaves pensions unimpaired,” a Franklin attorney, Jim Johnston, told the court last October. “It just has to treat Franklin as a dissenting creditor fairly.”

Judge Klein, with an eye on Vallejo, said he would not approve an exit plan likely to result in a second Stockton bankruptcy. In his exit plan approval last Oct. 30, separate from the Oct. 1 pension ruling, he seemed satisfied the city will remain solvent.

“This plan, I am persuaded, is the best that can be done in terms of the restructuring and adjustment of debts of the city of Stockton,” the judge said.

He mentioned voter approval of a ¾-cent sales tax, pay cuts that result in lower pensions, the elimination of retiree health care and removing debt payments from the previously debt-ridden general fund.

A budget forecast issued by Stockton last April shows a general fund reserve staying above 5 percent for two decades, when it reaches the target of 17 percent and stays there for another decade.

Noting the Franklin appeal, Klein said last week he will be watching: “I’m going to keep a status conference at all times until this case is closed.” He set the next one for 9 a.m. March 31.

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Originally posted at CalPensions.