Chapter 17: Bankruptcy Ruling Cuts CalPERS Down To Size

by | Feb 23, 2015 | Pension

By: Jeff Chang

On February 4, 2015, the Judge overseeing the City of Stockton bankruptcy issued an opinion, overruling Franklin Templeton’s lone objections to the City’s plan of reorganization and, very pointedly, clarifying the true role of CalPERS – at least in a bankruptcy context.

For those new to the case, some quick background. When the City filed for chapter 9 protection in 2012, it successfully negotiated away over $2 billion in long-term debt with all of its creditors except one. Facing a potential loss over $32.5 million, Franklin Templeton rejected the City’s settlement offer and filed suit, arguing against CalPERS’ claim of public pension inviolability and basically asserting that the pension giant needed to get in line with its hand out for its money like everyone else.

According to the judge’s ruling, Franklin Templeton may have been right, but it didn’t win. And in the sense of a “win,” neither did CalPERS, which Judge Klein characterized as a bully with a glass jaw (really, read the opinion).

So what does it all mean? Here are my takeaways:

  1. A careful examination of the relationships between CalPERS, a participating employer and its employees reveals that CalPERS is not a major creditor of any participating employer because it does not guarantee the funding of employees’ pensions. “CalPERS is merely a servicing agent that does not guarantee payment.”
  2. In evaluating the respective rights and responsibilities of various chapter 9 creditors, it is the employees and retirees of a city who are one of the largest, if not the largest creditor. An insolvent city must negotiate with them to obtain appropriate wage and benefits concessions.
  3. Because CalPERS does not guarantee the pensions it “services,” CalPERS appears to lack standing to object to pension modifications in a chapter 9 proceeding.
  4. Provisions in the Public Employees Retirement Law that purportedly forbid the rejection in bankruptcy of a CalPERS contract and provide for a CalPERS lien for termination liabilities are both ineffectual in a federal bankruptcy context.
  5. The vaunted “vested rights” doctrine under both California case law and the state and federal Constitutions does not prevent Congress from enacting a law (the federal bankruptcy act) impairing a state or local government’s obligation of contract.

How will this all affect other pending and future municipal bankruptcies? Stay tuned.

Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at jeff.chang@bbklaw.com or (916) 329-3685.

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