Can public pensions be cut in bankruptcy?

When the judge asked what Franklin is proposing, Johnston said Stockton can impair pensions and treat creditors fairly or assume pension liabilities and pay Franklin a fair share, but it shouldn’t pay CalPERS in full and severely short Franklin.

So, the judge asked, Franklin contends pensions should be impaired? “Yes,” replied Johnston. He said the judge’s decision allowing a cut in Stockton retiree health care “comes close” to deciding that state law is pre-empted in bankruptcy.

Among other decisions cited by Johnston was a ruling by Judge Michael McManus in the Vallejo bankruptcy that overturned a city labor contract with an electrical workers union after lengthy mediation failed.

Stockton argues that pensions are needed to be competitive in the job marketplace, particularly for police. The employee share of debt reduction is said to be pay cuts, no retiree health care and a state law giving new hires lower pensions.

“If you attack CalPERS, it’s attacking the retirees and the future retirees,” Margaret Garms, an attorney for the Stockton Police Officers Association, told the judge last week.

Garms said police have had pay cuts totaling about 30 percent. She said only 350 of the 480 authorized police positions are filled. “As fast as they hire new officers people leave,” she said, with an average experience of 2½ years on the job.

“I would urge that the court does not need to address pensions in this case,” said Jason Rios, an attorney for the Stockton retiree committee. He said a pension cut would drop the income of some retirees below the poverty level.

Marc Levinson, an attorney for Stockton, said Franklin rejected a much higher debt payment offer in early negotiations. “Now Franklin wants to pick up everything that’s left and benefit from concessions other creditors made,” he said.
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Ed’s Note:  Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.