02 October 2014

BIG News from Stockton. Maybe.

Followers of my blog will know that I've regularly inveighed against the heavy-handed tactics of the California Public Employees Retirement System or CalPERS. Go here, here, and here for a sampling. Under California law, CalPERS has the unilateral power to set the rates cities must contribute to the pensions they maintain for employees AND the unilateral power to charge what amounts to a penalty to cities that have the temerity to withdraw from the CalPERS-administered pension system AND the power to impose a lien on all city assets to compel payment of whatever CalPERS decides is owed.

At least that's what California law says.

But the city of Stockton is under federal jurisdiction because it filed a Chapter 9 municipal bankruptcy last year and Bankruptcy Judge Christopher Klien has concluded that California law is trumped by the Bankruptcy Code. Read about it in the New York Times DealBook here. CalPERS has the power to set the "exit fee" that Stockton must pay but that's only a claim and like any other claim in bankruptcy must get no more than its ratable share of what the city pays out over the course of the next several decades. In other words, Judge Klein concluded that he had the power under the Bankruptcy Code to knock off ("avoid") CalPERS's lien on city assets. Thus, CalPERS must share in the pot life regular folks.

And in that Judge Klein is correct. For a lengthy explanation of why I think he's right download and read my recently published article, Municipal Bankruptcy: When Doing Less Is Doing Best (here).

But there may be less to this decision--as momentous as it is--than meets the eye because Stockton doesn't want to stop paying CalPERS. I suppose we could replace the "Stockholm Syndrome" with the "Stockton Syndrome" to describe the situation where the captive begins to identify with the captor but that's essentially what's happened here. Stockton was so fearful of challenging the behemoth CalPERS that's it's fallen in with the bully at the expense of other creditors (like bondholders).

Yet hope remains. Judge Klein didn't approve Stockton's plan that treats other creditors less favorably than CalPERS so perhaps between now and the end of October Stockton will work up the fortitude to modify its plan to ensure that it does not "unfairly discriminate" in favor of the Powerful One at the expense of the many.

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