First came Los Angeles Superior Court Judge Rolf True’s ruling that teacher tenure laws are unconstitutional and “shock the conscience” because they protect incompetent teachers and funnel them to the schools in poor minority communities that most need the best teachers.

Now U.S. Bankruptcy Judge Christopher Klein has struck another blow for sanity by rejecting CalPERS’ argument that the city of Stockton can’t cut the pensions of city employees and retirees as it tries to get out of bankruptcy. CalPERS’ claim that state laws somehow trump federal laws has always seemed strange. Klein’s comments Wednesday certainly reflected that view. This is from Ed Mendel at calpensions.com:

Part of his analysis yesterday that CalPERS pensions are not state “governmental or political powers” protected under federal bankruptcy law is that while state workers are in CalPERS by statute, cities choose to join CalPERS.

Klein said California cities have the option of forming their own pension systems, joining a county pension system, hiring a private pension provider or withdrawing from CalPERS, if they can afford to do so.

He concluded that benefits not prescribed by state law are not “governmental or political” powers protected by the federal bankruptcy law, but instead are unprotected “business powers.”

Klein said a CalPERS-sponsored state law preventing cities from rejecting their CalPERS contracts in bankruptcy is “flat-out invalid” under the constitutional “supremacy clause” giving federal law priority over state law.

The judge said another CalPERS-sponsored state law that gives CalPERS a lien on all city assets, except wages, when they declare insolvency is an invalid attempt by the state Legislature to “edit” the federal bankruptcy law.

Judge: “Why should I take [CalPERS claim] seriously?

The New York Times treated this ruling as a major national story and made a point that California coverage did not: “Judge Klein’s ruling went beyond anything that Stockton was seeking.” More from the NYT:

Calpers had argued that if Stockton stopped making payments and dropped out of the state pension system, the lien would let it claim $1.6 billion of its assets. But Judge Klein said those statutory powers were suspended once a California city received federal bankruptcy protection.

“Why should I take that lien seriously?” he asked a lawyer for Calpers, Michael Gearin. …

“The bankruptcy code provides that the lien can be avoided and be treated as an unsecured claim,” Judge Klein said.

Judge Klein also said that Stockton had many options other than Calpers for retirement benefits: a private provider, like an insurance company; a multiemployer pension plan affiliated with a union; one of California’s county-run pension plans; or it could even offer no pensions at all.

“There are lots of permutations and combinations out there with respect to the art of the possible,” he said, adding that nothing in the law required any city to give its business to Calpers. “The whole world is out there.”

Conservatives, libertarians and believers in small government have long viewed the courts with suspicion. That’s especially so in California, where conservative ballot propositions have often been scrapped or enfeebled by courts but liberal ballot measures rarely seem to get picked apart.

But Judge Treu and Judge Klein go against that narrative — and offer hope that a new balance of power is coming in a state dominated for too long by public employee unions.

]]> https://calwatchdog.com/2014/10/02/stockton-ruling-like-vergara-ruling-shakes-ca-status-quo/feed/ 20 68689 https://calwatchdog.com/2013/04/03/bankruptcy-judge-calpers-a-garden-variety-creditor/ https://calwatchdog.com/2013/04/03/bankruptcy-judge-calpers-a-garden-variety-creditor/#comments Wed, 03 Apr 2013 13:15:41 +0000 http://www.calwatchdog.com/?p=40329 April 3, 2013

By Chris Reed

As John Seiler pointed out here Tuesday, Monday’s court ruling by U.S. Bankruptcy Judge Christopher Klein isn’t seen as definitive. Yes, the city of Stockton can proceed with its bankruptcy filing. No, Klein doesn’t yet agree with the city’s plan to only short bondholders and not CalPERS, its biggest creditor, as it reorganizes under Chapter 9 of federal bankruptcy law. He explicitly said later that he will decide on its fairness later.

But did Klein make one crucial point in his ruling and comments from the bench? Maybe, and I’m not the only one who thinks so.

Consider this: Every newspaper advance story that I saw before last week’s hearings in Klein’s court spoke of the centrality of the CalPERS argument that promised pensions were protected by the state Constitution, which should take precedence over federal bankruptcy laws which allow federal courts to modify contracts that bankrupt entities have with their creditors.

Pension preservation: State law vs. federal law

So did the most sophisticated legal analysis of Stockton’s pension-protection proposal that I read before Klein’s April 1 ruling. It appeared in January on the Bankruptcy Law Insights blog and was written by bankruptcy expert Ben Feder:

“The issues at stake — whether California state laws protecting public employee pension obligations are pre-empted and superseded by Congress’s Article I, Section 8 authority to establish uniform laws regarding bankruptcy, or are protected under the Tenth Amendment — implicate fundamental issues of federalism, and in all likelihood the Supreme Court will eventually need to resolve the questions being raised regarding the proper balance between state and federal power … .

“The [most] complicated question is whether priorities for unsecured claims created under state law — particularly regarding obligors that are themselves governmental units — can trump the distribution mechanisms of the U.S. Bankruptcy Code, and the Code’s underlying purpose of providing similar treatment for similarly situated creditors. Numerous states in addition to California have varying degrees of protection for public employee pension obligations. (Rhode Island, on the other hand, recently took the opposite tack and enacted a law that gave priority to bondholders in the Central Falls Chapter 9 cases.)

“Calpers will argue that the preference under California law for public employee< pension obligations is protected under the Tenth Amendment. San Bernardino’s bond investors will argue that the Bankruptcy Code expressly sets forth the priority of certain types of unsecured claims, that no other unsecured claims are entitled to more favorable treatment, and that California law regarding public employee pension obligations is pre-empted by the Supremacy Clause of the Constitution.”

‘Powers not delegated to the U.S. are reserved to the states’

What is the relevance of the Tenth Amendment? This is from CalPERS’ counsel:

“The Tenth Amendment provides that the ‘powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states … or to the people.’ This is no minor addendum to the Bill of Rights; this amendment reflects the federal structure of our government.

“This structure allocates and ultimately provides limits on the powers of dual sovereigns — the federal government and the governments of the States. The Tenth Amendment and the principles of federalism preserve the integrity and residual sovereignty of the States, and ensure that the States function as political entities in their own right.”

But at least based on published accounts, the knotty question of deferring to the California Constitution’s pension protections or interpreting the Tenth Amendment to the U.S. Constitution as preserving the state’s decision-making authority on such matters didn’t seem knotty at all to bankruptcy Judge Klein.

Klein depicted CalPERS as a “garden-variety creditor” -– not one in a protected class.

He also said that going forward, he “is going to have a difficult time confirming a [bankruptcy reorganization plan] over the objection of unfair discrimination.” That’s a reference to Wall Street bondholders’ objecting to CalPERS being insulated from any of the pain facing other creditors. That’s another way of saying he rejects the idea that CalPERS is in a protected class.

Complex question — or not even a close call?

So instead of being a complex, challenging legal issue, Klein doesn’t appear to see this as a close call at all: Federal bankruptcy law supersedes the California Constitution, and the Tenth Amendment doesn’t shield CalPERS either.

I welcome any counter interpretation in the comments. And I acknowledge that an appeals court could completely disagree with Klein and go in another direction.

But I also think there is a chance that April 1, 2013, is remembered as a turning point in how Chapter 9 allows local governments to deal with their immense pension debts. We’ll see.

By John Seiler

It’s official: The city of Stockton is bankrupt. On April 1, U.S. Bankruptcy Judge Christopher Klein ruled that Stockton’s bankruptcy can proceed. “It’s apparent to me the city would not be able to perform its obligations to its citizens on fundamental public safety as well as other basic government services without the ability to have the muscle of the contract-impairing power of federal bankruptcy law,” he wrote.

Opinions were divide on whether the ruling helped the private bondholders, which wanted the court first to reduce the city’s generous pensions for retired public employees; or whether it helped the public-employee unions, which insist that the bondholders first take a “haircut” on their claims on city funds (which funds, of course, are provided by taxpayers).

The bottom line: “This was a preliminary round,” Dan Pellissier told me; he’s the president of California Pension Reform, which has been working to change state pension laws. “It didn’t get to the question people wanted to hear. It was more of an administrative decision.”

That wasn’t how it was seen by some. “In the context of going through the findings of fact, [the judge] made some comments about how Chapter 9 is all about giving them the ability to impair contracts because the only place you can do that is bankruptcy court,” bankruptcy lawyer Karol Denniston told the Inland Valley Daily bulletin. “He’s correct with all that, but it’s interesting that he chose to emphasize that.”

The contracts to be “impaired” would be those between Stockton and the unions concerning pensions. The California Constitution widely is interpreted as precluding the breaking of such contracts. However, this is a federal bankruptcy court. So it depends on whether the U.S. Constitution and federal law allow a federal judge to break such contracts.

“The ruling never addressed whether federal bankruptcy code trumped constitutional protection,” Pellissier said.

Pension problem

A different view from Denniston’s came from the Wall Street Journal’s editorial page, which wrote:

“The San Joaquin Valley city of 300,000 intends to use bankruptcy to stiff capital market creditors in order to pay for its workers’ rich pensions, which will merely encourage other insolvent municipalities to do the same.

“Stockton filed for bankruptcy last summer after a three-month confidential mediation with creditors failed to substantially reduce its long-term liabilities or close its $25 million deficit. Assured Guaranty and National Public Finance Guarantee, which insure about $260 million of the city’s bond debt, pulled out of negotiations after the city council refused to haircut the city’s single largest creditor, the California Public Employees’ Retirement System (Calpers).

“Meanwhile, the city was proposing to slash by 80% the $125 million in principal on pension obligation bonds that it had issued in 2007 to pay an overdue bill to Calpers. Never before has a bankrupt city reduced principal on its debt. In its Chapter 9 eligibility trial, Stockton nonetheless blamed bond insurers for negotiating in bad faith—an argument Judge Klein echoed in his ruling.”

‘Over-interpreting’

“Everyone is over-interpreting,” Pellissier observed. “This was just Stage 1, whether the city is eligible for bankruptcy. They said, ‘We’re out of money after a perfunctory attempt to balance the budget.'”

As to the operation of the court, he said, “The role of a federal bankruptcy court is impairing contracts,” meaning the court decides which contracts are modified or voided. For example, in the 2009 General Motors bankruptcy, the federal court decided that the United Auto Workers union had precedence over bondholders, dealers and investors.

However, Pellissier said that federal court dealings with municipalities is different than those with private companies because of constitutional issues governing federal and state powers. “In the private sector, a judge can divide the assets himself,” Pellissier said. “For a municipality, he can only approve what the city wants to do.”

The problem is that if the pensions are the city’s No. 1 priority, then the only way to pay for them is to cut city services even more than they already have been. The Huffington Post reported that, since recent budget cuts that have reduced the number of police, murders in Stockton have soared. If taxpayers’ money mainly goes to the pensions of retirees no longer working for the city, it’s a good question why the city government even should exist.

Bond prices

Another factor with not only statewide importance, but national importance, is how slamming the bondholders first would affect municipal bond prices. If bondholders are more vulnerable than retirement funds, then bond interest rates would rise, making it harder for municipalities to borrow, in turn raising the costs for taxpayers.

Although given the foolish projects funded by many cities — such as the $47 million Stockton blew on a sports arena, which contributed to the bankruptcy — higher interest rates might cancel such follies in other cities. That would be a good thing.

The Stockton bankruptcy approval has implications for San Bernardino, which also declared bankruptcy last year. (Mammoth Lakes declared bankruptcy as well. But its problem was losing a lawsuit, not pensions.)

According to the Daily Bulletin, Stockton’s successful argument in court is “the same basic argument San Bernardino has been making since it filed for bankruptcy protection in August, and other cities might soon find themselves in similar situations.” Which means San Bernardino’s lawsuit also has a good chance of advancing.

The Stockton court decision also is a sharp warning to other municipalities and school districts — and to the state itself — to get their financial acts together. The state, in particular, needs to enact pension reforms much stronger than the weak “reform” enacted last fall to gull voters into supporting Proposition 30, the $6 billion tax increase.

Rhode Island, which is even more dominated than California by Democrats, bravely has undertaken pension reforms after the city of Central Falls went bankrupt.

Taxpayer funds are not unlimited. Spiking pensions more than a decade ago, as this writer warned many times back then, inevitably would lead to governments going belly up. Unless reforms are made soon, the bankruptcies are just starting.