Stockton Bankruptcy Ruling Backs away from Pension Reform

Jack Dean likes to tell the story of Prichard, Alabama, a city that declared bankruptcy not once, but twice.

“They were warned that the pension fund was running dry, and in 2009, it ran dry,” says Dean. “So they stopped mailing the checks.”

Dean, the editor and founder of PensionTsunami.com, tells the cautionary tale of Prichard in response to Thursday’s federal ruling that gave the California city of Stockton the green light to exit bankruptcy by paying bond investors chump change while protecting public pensions. 

“Once again, Calpers has managed to intimidate a city government into not dealing with the pension issue,” says Dean. “So we’ll continue to careen down the pension crisis path, because they’re not paying attention to the elephant in the corner.”

While Stockton pensioners breathed a sigh of relief, an executive at Calpers, the nation’s largest pension fund, called U.S. Bankruptcy Judge Christopher Klein’s ruling “smart.”

“The city has made a smart decision to protect pensions and find a reasonable path forward to a more fiscally sustainable future,” Calpers Chief Executive Officer Anne Stausboll said in a statement. “We will continue to champion the integrity and soundness of public pensions.”

Earlier this month, Judge Klein issued the explosive decision that pensions can be reduced in bankruptcy, but on Thursday, he accepted the city council’s plan for Stockton, suggesting the workers had suffered enough.

“What it means is when you go into bankruptcy, pensions are not protected,” says San Jose Mayor Chuck Reed, who’s leading California’s pension reform movement. “But in this case, Judge Klein looked at the whole package, and decided that employees gave up their health care for pennies on the dollar… So you don’t necessarily have to cut pensions, you don’t necessarily have to cut health care, you don’t necessarily have to cut salary, but you have to do something to deal with the problem. Employees have to share the pain.

“The takeaway for California is it would be a whole lot better if we could deal with these problems outside of bankruptcy and before bankruptcy.”

Reed says local governments should be empowered to negotiate changes in future benefits as a means of controlling the costs in order to avoid the pain of bankruptcy. 

“It’s certainly a knockdown, drag out fight in San Jose,” says Reed, who is calling for the U.S. Justice Department to investigate San Jose’s police union for corruption. “The good news is, we’re saving 25 million dollars a year due to our pension reforms and we’re putting that back into city services.”

In court on Thursday, Judge Klein suggested that Stockton’s plan was the best it could do and that bankruptcy was a dauntingly expensive proposition.

But attorney Robert Flanders, the municipal fix-it guy in Rhode Island, says when push comes to shove, don’t be afraid of the “B” word.

Flanders, a partner in the law firm Hinckley-Allen, was the state-appointed receiver in Central Falls, Rhode Island, which went through a bankruptcy restructuring in 2011 and came out the other side.

“It was plain that we were running out of cash to pay people,” says Flanders. “That’s when I had to go in front of them and say, ‘I’m sad to say this, but there’s a risk that you’re not going to get paid at all and we’re going to default. A haircut still looks a lot better than a beheading.’ It really was the true situation.”

Thirteen months later, the city was back in business and ultimately retirees ended up with a 25 percent haircut, down from a high of 55 percent. 

“We took the opportunity of the bankruptcy to not only restructure the pension system, but get rid of the gamesmanship and make it much more favorable to the taxpayers,” says Flanders. “It can be done, and it can be done quickly. The beauty of it from a legal standpoint is all the arguments about breach of contract amount to a hill of beans in a bankruptcy proceeding because the only issue is what can a city afford.”

He says Judge Klein is giving Stockton the benefit of the doubt. But Stephanie Gomes, the former vice mayor of Vallejo, says Stockton missed the opportunity to learn from Vallejo’s mistake. Vallejo was the first California city to topple.

“If I were on the Stockton city council, I would’ve pushed for some sort of pension reform,” says Gomes, who was on the Vallejo city council before, during and after the city declared bankruptcy. “We didn’t have a majority willing to do that, and because of that, we are still saddled with crushing pension debt in Vallejo, and we’re still struggling with our exit plan.”

In effect, she says, Vallejo failed bankruptcy.

“I call Calpers ‘Hotel California,'” says Gomes. “Once you’re in, you can never leave. Until there’s statewide reform, there’s not much cities can do.”

For John Moore, a candidate for mayor in the seaside town of Pacific Grove, California, Thursday’s ruling was a bummer.

“Judge Klein led us on for about a year,” says Moore, a retired attorney whose run for mayor is an attempt to tackle Pacific Grove’s pension debt. “We thought something really big was going to happen, and now we have a plan that has no chance of working.”

Dean says nothing changes the fact that Stockton’s pension fund is millions in the hole. 

“When the checks stop coming in the mail, maybe we’ll get reform.”