Judge Approves Bankruptcy Exit for Stockton, Calif.

A federal bankruptcy judge on Thursday confirmed a plan for Stockton, Calif., to exit bankruptcy, rejecting arguments that it unfairly discriminated among creditors by shielding the city’s retirees from any impairment of their pensions.

Stockton had asked the court to approve an exit plan calling for budget austerity, haircuts for bondholders and even a sales-tax increase, which city residents approved in a referendum last year. Judge Christopher M. Klein of the Federal Bankruptcy Court for the Eastern District of California in Sacramento said he found the proposed plan acceptable because although it did not directly cut the pensions, it did eliminate the retirees’ health benefits and other elements of the city workers’ compensation package.

Judge Klein called the changes “significant concessions,” especially the retiree health plan, which he said was a total loss to retirees of about $550 million. Until Stockton became severely distressed in 2008, it had promised all city workers and their dependents free health care in retirement without ever setting aside any money to cover the cost.

Even as he ruled that Stockton was ready to leave bankruptcy court protection, Judge Klein said he had not changed his thinking about public pensions since his previous oral decision on the issue earlier this month. He said at the time that Stockton was free to abrogate its contract with California’s big state pension system, known as Calpers, in bankruptcy. And he repeated on Thursday that if Stockton were trying to terminate its pension plan, Calpers would not be able to force the city to pay it $1.6 billion — the amount needed to pay everybody their benefits in perpetuity, at no risk to Calpers. He said the state laws giving Calpers the ability to accelerate all of Stockton’s future pension contributions were pre-empted by the federal bankruptcy law.

“Bankruptcy is all about the impairment of contracts,” Judge Klein said. “That’s what we do.”

In addition, he reiterated that Calpers was not Stockton’s biggest creditor, as some had argued at the beginning of the bankruptcy.
But because Stockton’s plan to exit bankruptcy did not include the termination of its contract with Calpers, Judge Klein’s finding did not affect what the city will have to pay to keep its plans funded going forward.