We reported a couple of weeks ago about a tentative ruling issued by a federal bankruptcy judge regarding the City of Stockton bankruptcy plan. At that time, the media reported that the judge found that the City could cut its pension obligations to CalPERS in order to pay greater sums to Wall Street creditors or even to withdraw from CalPERS altogether. As we predicted, those concerns never materialized. Yesterday, the judge approved Stockton’s original bankruptcy plan, which did not propose any reduction of its pension obligations. This means that Stockton will continue to pay all of its pension obligations, and pensioners will receive all of their vested pension benefits.

In his ruling, the judge repeated that the contract with CalPERS could be rejected as part of the bankruptcy proceedings. However, he noted several problems with doing so including:

• Ultimately, it would not save very much money;
• The City hires employees with the expectation that they will be paid certain salary and benefits, including pension benefits;
• It would hurt the City employees and retirees who are the “victims” here and not CalPERS;
• It would be more expensive to replace CalPERS with another pension system;
• The City and the employee unions had already negotiated wage reductions in lieu of pension cuts to address the budgetary shortfalls. If the Court rejected CalPERS’ contract, and therefore the MOUs, the employees would have given up wages only to have their pensions reduced as well. This would create hiring and retention issues for the City; and
• It was unnecessary to violate the MOUs when the City has already passed tax increases that made it possible to continue providing services.

While we disagree with the judge’s initial determination that pension obligations can be modified in a bankruptcy proceeding, we believe that the judge wisely recognized the practical consequences of such a drastic measure. There is a chance that one of the creditors will appeal this decision, and we will be monitoring the situation closely.  For now, however, we believe that this decision will not have any impact on the vested rights doctrine or public entities’ pension obligations. In other words, your pensions are safe.

Our original blog with a more detailed discussion of the possible implications of discharging pension obligations via bankruptcy proceedings can be found here: http://www.laborbeatblog.com/?p=262.

If you have any questions, please contact Jennifer Stoughton at jennifer@majlabor.com.