Crunch time in bankruptcy court

Today’s paper reports that Federal Judge Christopher Klein sees Stockton’s bankruptcy case as an opportunity to examine the “festering sore” of state pensions “and perhaps to determine the court’s possible role in pension reform.”

Bet that made the collective blood pressure spike over at CalPERS.

Klein outlined the parameters of his possible actions. “It’s conceivable I could conclude that (Stockton’s) CalPERS contract could be impaired and the (financial reorganization) plan not be confirmed,” Klein said. “Or I might conclude the CalPERS contract can be impaired, but in this case the decision (by the city) not to do so made sense. Or I could decide CalPERS can’t be impaired because of California law. That’s what’s going on in my brain. This is an opportunity to get to the bottom of it.”

So in the first eventuality the judge might conclude that Stockton’s decision not to cut employee pensions is unjust to other creditors; and that federal law trumps state law; and send Stockton back to the barbershop with orders to give CalPERS a haircut.

That, of course, would be historic. Such a  precedent would amount to de facto pension reform. It would change the equation in cities up and down California and across the country. It would liberate cities to bring pension obligations in line so that they might offer proper services to their citizens. It would enhance the quality of life for millions of Americans — but at the cost of weakening the security of public retirees.

The second eventuality is the one I’m rooting for. The judge decides CalPERS does not enjoy special immunity — which it should not — but says in Stockton’s case ducking a fight with CalPERS makes sense (note theCalPERS attorney’s veiled threat in the story). That too would have the effect of pension reform. But Stockton would not have to be the David to champion it.

The third eventuality — CalPERS can’t be impaired — would be sad since reform is so badly needed. But it would validate Stockton’s decision not to cut pensions. 

To say I am following the case with interest is understatement.

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    Michael Fitzgerald

    Mike Fitzgerald is The Record’s award-winning metro columnist. His column runs in the paper three times a week. Born in San Francisco, he was raised in Stockton. His column covers diverse beats including, sometimes, the offbeat. Read Full
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