Stockton bankruptcy judge’s pedigree, history offer hope

bkMarch 27, 2013

By Chris Reed

The stakes are immense in the four-day trial in Sacramento’s federal bankruptcy court this week. The New York Times frames the issue well:

“Wall Street is taking America’s biggest pension fund to court this week, for a long-awaited battle over who takes the losses when a city goes bust — workers and retirees, municipal bondholders, or both.

“Stockton, Calif., declared Chapter 9 bankruptcy last year after suffering one of the country’s sharpest riches-to-rags swings when the mortgage bubble burst. Struggling to stay afloat, Stockton has slashed tens of millions of dollars’ worth of city services — firefighters, senior centers, library programs for at-risk children — and said it would cut its municipal bond repayments to a degree never seen before in a municipal bankruptcy.

“But it has drawn the line at slowing down its current workers’ pension accrual, or cutting the benefits its retirees now receive.”

If judges pay attention to current events and tailor their opinions accordingly — as many legal scholars believe — then Judge Christopher M. Klein could strike a huge blow for pension sanity and for local and state governments avoiding catastrophe. The present status quo of services being scrapped and roads falling apart because of excessive government pension benefits isn’t just unsustainable. It’s horrible governance.

stockon.bk

So how will Klein rule? He’s got a J.D. and M.B.A. from the University of Chicago, which is about the best possible pedigree for those hoping he strikes a blow for pension sanity. There’s no university in the nation more known for advocating economically rational, evidence-driven public policy.

And a commercial law expert’s analysis of an early Klein ruling in the Stockton case suggests he doesn’t believe municipal contracts are inviolate at all.

“Like many municipalities (and states, for that matter) Stockton owes its retired employees far more in pensions than it can hope to pay.  …  

“Stockton filed bankruptcy to avoid paying the benefits it had contracted to pay but could no longer afford. But wait, the retirees argued, Stockton is an instrumentality of the State of California and, as we have seen, the U.S. Const. Art. 1, Sec. 10 specifically prohibits the states from messing around with contracts. While admitting that the federal government’s constitutional bankruptcy power can discharge most contractual obligations, the retirees asserted that it cannot be permitted to do so in Stockton’s case without contradicting the constitutional text. The irresistible force meets the immovable object.

“An ingenious argument but Bankruptcy Judge Christopher Klein didn’t buy it. (Judge Klein’s lengthy opinion, Assoc. of Retired Employees, et al. v. City of Stockton (In re City of Stockton) can be found at 2012 WL 3193588.) First, he observed that § 904 of the Bankruptcy Code clearly prohibits the court from granting any interim relief to the retirees. Second, and much more fully reasoned (in anticipation of an appeal, one suspects), Judge Klein concluded that the Bankruptcy Clause in effect trumps the Contracts Clause, at least in this case. In short, the City of Stockton can ‘interfere’ with its ‘Obligation of Contracts'” because the State of California has permitted it to file for relief under Chapter 9 of the Bankruptcy Code.”

Pretty promising. Go, Judge Klein, go.

11 comments

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  1. loufca
    loufca 27 March, 2013, 07:52

    This decision will have a far greater impact on California than the Prop 8 decision in the Supreme Court.

    Reply this comment
  2. Barb
    Barb 27 March, 2013, 07:52

    Finally, someone with common sense!

    Reply this comment
  3. Hondo
    Hondo 27 March, 2013, 08:25

    Even if this judge does a back flip and rules in the unions favor, it is still a catastrophe for the state. Then wall st will jack up the prices of bonds issued in the state and everyone will get slammed.
    There is no good option here.
    And even if the judge rules against the union, then Calpers then appeals to the state supremes or the 9th circut.
    Hondo…..

    Reply this comment
  4. eyeamok
    eyeamok 27 March, 2013, 08:33

    Then wall st will jack up the prices of bonds issued in the state and everyone will get slammed.

    Which is why I advocate for ALL INTEREST DUE for Monies Borrowed SHALL BE PAID BY PUBLIC EMPLOYEES through a Separate Payroll Tax for “Public Employees” on Income and Pension Benefits, We The People can be responsible for the Principle, but ALL INTEREST SHOULD BE PAID BY GOVERNMENT EMPLOYEES and Recipients of GOVERNMENT PENSIONS. This would immediately stop all the Wild eyed Borrowing.

    Reply this comment
  5. Sean Morham
    Sean Morham 27 March, 2013, 15:17

    Can see this appealed all the way. The unions will never, never back down. I am sure some of their members would make Occupy Wall Street look like a KIndergarten field trip. Personally, my 401k has money invested in funds consisting of some the bonds the city of Stockton desires to take a haircut instead of calpers, and I am sure many of the ” public servants’ think that is only right. To all of them, FU.

    Reply this comment
  6. SkippingDog
    SkippingDog 27 March, 2013, 15:53

    Unlike the retiree health benefits contract which was the subject of Judge Klein’s earlier decision you adore, pension benefits are specifically addressed and protected by the state constitution.

    Chapter 9 specifically prohibits the imposition of remedies that violate state laws. If you hoped for legal outcome is correct, and Judge Klein can ignore the pension provisions of our state constitution, there is no reason he could not choose to ignore other state constitutional provisions as well, such as the taxing limits imposed by Prop 13.

    If one state constitutional provision is in play, they are all in play.

    Reply this comment
  7. us citizen
    us citizen 27 March, 2013, 17:08

    So CA is going to be the next Cypress…………better go hide your money fast.

    Reply this comment
  8. mbecker908
    mbecker908 27 March, 2013, 19:00

    One way or another, the world of municipal bonds is on the verge of a totally new existence. Underwriting is going to get significantly more rigorous, interest rates are absolutely going up and you can expect new bonds to be tied to revenue streams to make the payments. The days of free spending by city officials for fancy toys and the days of floating a bond to make payments to unions is about to hit the wall.

    California made it’s bed – as did Illinois, another blue nightmare – and they’re about to discover the bed of roses is full of thorns.

    Reply this comment
  9. Pierre Yankopolus
    Pierre Yankopolus 27 March, 2013, 21:59

    Amazing this is even going to court. I am from Greece. Let me just sum this whole thing up. Be fiscally conservative.
    There is no way you can continue to pay for extravagant retirements and benefits. You work for 20 years and want to do nothing and have everything. Go to Greece and see how well that has worked out. I have become aquainted with so many Californians’ who worked for 20% of their lifespan and get more money yearly than anybody who works in the service industry 5 days a week year round. The people of Stockton have a debt to pay and the pensions cannot be sustained at a royalty level. Don’t go down the path Greece took. It ends horribly. Do not let greed ruin your pensions. Pay your debts, get involved with rebuilding your city and be proud that you built a foundation for your children and grandchildren. There is no free lunch.

    Reply this comment
  10. nonoise
    nonoise 3 October, 2014, 09:21

    Wow. Funny that memories can be so convenient. Monies paid into Calpers are nothing more than wages paid for work already done. To those of you who say they should take a haircut on their pay, let’s see what happens when someone tells you that due to someone else’s shortsightedness and greed, they can help themselves to your pay.

    There’s this meme going around that public employees have it easy. I’m one of them and I can tell you that there’s not a bigger lie out there right now. If you can’t get your finances in order, don’t jump on the “blame the public worker” bandwagon. I haven’t had a raise in over eight years. My Calpers is a contract for work that I’ve done and not some kind of investment ‘gamble’ that bondholders take. My pension will be less than half of my take home. That, and Social Security will keep my head just above water when I retire. My situation is representative of the vast majority of public service workers.

    Yes, there are those in the system who will take an extremely comfortable payout but they are the exception to the rule and represent a tiny fraction of payouts and benefits. Has everyone here forgotten what Wall Street did in 2008? Back then we were warned that this would happen: that pensions would be targeted next so the con was on to lend to cities that were already in trouble and set them up as patsies in order to grab the pension holdings or anything they could get their greedy hands on. Take a look at Detroit and Chicago. Not only are the pensions being robbed, but the buildings, artwork and utilities are being taken. This is just another scam in a long line of scams.

    Reply this comment
  11. cornell
    cornell 18 January, 2015, 21:52

    chapter 9 Sockton CA

    Reply this comment

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