Employees of the bankrupt city of Stockton could be forced to take a 60 percent pension cut if a federal judge rejects its reorganization plan, a lawyer for the city said Wednesday in a case that could clarify who gets paid first by financially strapped cities around the nation — retirement funds or creditors.
The contention by Stockton attorney Marc Levinson came during arguments at a hearing in the bankruptcy case in Sacramento.
Much of the case centers on whether Stockton’s payments to the California Public Employees’ Retirement System are off limits to creditors as the city tries to end its Chapter 9 protection.
A key creditor, Franklin Templeton Investments, says the pension payments are fair game as it tries to collect on an unsecured $32.5 million claim against the city.
“The $64,000 question is, can the city’s ... pension obligation be adjusted in this case,” Franklin Templeton Investments attorney James Johnston said during the proceedings.
Stockton, an inland port city, became the largest city in the country in 2012 to file for Chapter 9 protection before Detroit made the move last year.
Levinson told U.S. Bankruptcy Judge Christopher Klein on Wednesday that a ruling against the city and the CalPERS pension fund could prompt most city employees to leave rather than face what could be a 60 percent reduction in pension benefits.
The city might have to reduce benefits to its employees to pay as much as $1.6 billion to CalPERS to cover long-term pension obligations for existing employees, he said.
That could mean a “haircut” for employee pension payments, he warned, saying “that’s the number and it’s a big deal if you’re the recipient of one of these pensions.”
Judge Klein said he might rule on that question later in the day.
He spent much of the morning questioning whether CalPERS and its members enjoy a protected status under federal and state laws.
“One can’t mess with CalPERS, that’s the vernacular way of putting it,” the judge said at one point, summarizing the view of CalPERS and Stockton officials without saying if he agreed.
“Is CalPERS a state unto itself?” Klein mused later.
If the judge rules that the city should have used the bankruptcy process to trim financial obligations to the retirement system, that could have ramifications for Stockton and other cities struggling to pay bills and pension costs.
Before the recession, Stockton leaders spent millions of dollars revitalizing the downtown area with a new City Hall and building a marina, sports arena and ballpark. The city issued about 3,000 permits annually to build new homes, and it paid police premium wages and health benefits.
With the recession, building dried up, and Stockton became ground zero for home foreclosures. Like many residents, City Hall couldn’t pay its bills. The city slashed its budget by millions of dollars and laid off 25 percent of its police officers. Crime soared.
The city about 80 miles east of San Francisco wants Judge Klein to approve its plan for reorganizing more than $900 million in long-term debt, while Franklin Templeton Investments wants the judge to reject the proposal.
The city has reached deals with all of its major creditors, except for Franklin, which took Stockton to trial.
Johnson, the investment firm’s attorney, said during opening trial statements in May that it is being offered 1 cent on each dollar for a $35 million loan given to Stockton in 2009 to build firehouses and parks, and to move its police dispatch center.
Johnston told the judge that Stockton struck much more favorable deals with other creditors. The attorney said the city is making a meager comeback, allowing it to pay its debts to the firm.
The California city of Vallejo went through bankruptcy before Stockton, and San Bernardino filed shortly after Stockton, but it has yet to present an exit plan.
Stockton was once an official “All-America City” before hard times hit with the collapse of the housing market. In the years that followed, Stockton twice led Forbes magazine’s list of “America’s most miserable cities.”
At one point the police union was so upset over layoffs and a record homicide rate that it posted billboards tracking the city’s body count and disclosing the city manager’s phone number.