This article first appeared at The McAlvany Intelligence Advisor on Friday, October 3, 2014:

English: CalPERS headquarters at Lincoln Plaza...

CalPERS headquarters at Lincoln Plaza in Sacramento

All Franklin Templeton Investments wanted was a fair shake. All CalPERS wanted is what it already has: exemption from laws. As attorneys for CalPERS – the California Public Employees System – tried to defend the country’s largest pension plan from contentions that it was getting off scot-free in the Stockton reorganization plan while other creditors were getting hammered, they sounded rather silly.

They claimed that a combination of state laws and statutes dating back into history protected the $300 billion that CalPERS manages from sharing the pain with other creditors in proceedings. They referred to something called “triangulation,” a combination of agreements between Stockton, CalPERS, and the city’s workers that somehow created a sacrosanct unbreakable contract. They complained that if CalPERS were treated just as any other common creditor, Stockton’s pension plan beneficiaries could suffer up to a 60% haircut in their benefits.

They claimed that, if Stockton’s contract with CalPERS were voided, Stockton’s employees would up and quit and find work elsewhere where they would be covered under CalPERS. They claimed that treating CalPERS evenly with other creditors would give other cities teetering on the far edge of an “off-ramp on the highway,” allowing them to break promises any time they get in trouble. They also claimed that, if Stockton terminated its agreement with CalPERS, CalPERS would levy a termination fee of $1.6 billion and enforce it by placing a lean on Stockton’s assets.

Happily, US judge Christopher Klein treated all of that as persiflage, saying at one point during the testimony that “One can’t mess with CalPERS” and then asking, “Is CalPERS a state unto itself?” As far as the lien was concerned, Klein said: “Why should I take that lien seriously? I may void it as a black-letter matter of [federal] bankruptcy law. The bankruptcy code provides that the lien can be avoided and be treated as an unsecured claim.”

Klein was hearing testimony on both sides as Stockton officials presented him their plan for reorganization. Negotiations had resulted in tentative settlements with every creditor except Templeton, which loaned Stockton some $35 million during the run-up to the Great Recession. It rejected an offer of $350,000 to discharge that debt. Templeton said in its lawsuit that it was grossly unfair for them to take a 99% haircut while CalPERS remained untouched.

Stockton’s Mayor and City Council certainly enjoyed the ride during that run-up. Between 1998 and 2005, prices of real estate in Stockton, about 75 miles east of Sacramento, tripled, generating huge flows of cash into the city’s coffers from builders’ fees, sales, and property taxes. Indulging in straight-line thinking in a curvilinear world, the Mayor and his cohorts spent and borrowed, and then spent some more. They offered what some called “Lamborghini benefits” for its city workers, claiming that they were necessary to attract the talent the city needed. For example, if someone worked for the city for just one month, he and his spouse became eligible for health care benefits for life!

Following the Great Recession, reality set in, leaving Stockton with $400 million in unpaid debts and loans, and a gigantic unfunded pension liability with CalPERS. In June 2012, Stockton Mayor Ann Johnston took nearly six hours to explain just how Stockton had gotten itself into such trouble over the past several years. Two years later, the city is still trying to figure out how to dig its way out.

Klein’s ruling on Tuesday that Stockton’s contract with CalPERS was negotiable under federal bankruptcy law was met with disbelief by CalPERS:

This ruling is not legally binding on any of the parties in the Stockton case or as precedent in any other bankruptcy proceeding and is unnecessary to the decision on confirmation of the city of Stockton’s plan of [reorganization].

CalPERS has been spearheading the national drive to negate a ruling in the big Detroit bankruptcy that pension plans were not exempt from federal bankruptcy laws. Klein’s ruling on Tuesday blunted that drive considerably.

It’s a small decision in an obscure case way outside of the public’s view. But its potential is likely to be huge. Other municipalities like Stockton are teetering on the far edge of imminent bankruptcy, and will welcome an opportunity to let their pension plan obligations be part of the formula in becoming solvent once again. It’s also good news for municipal bond holders like those holding shares in Franklin Templeton, as they have wondered just how much of a hit they might take under this reorganization plan.

Taxpayers, pension plan beneficiaries, and bondholders will all take a hit when the Stockton deal finally comes together, perhaps as soon as next month. The only folks exempt from that pain will be the self-serving shortsighted politicians who got the city into trouble in the first place. It is said that life is not fair, but with Klein’s ruling life in Stockton, California just became a little less unfair.

—————————

Sources:

The New York Times: Bankruptcy Judge in California Challenges Sanctity of Pensions

The New : Boom and Bust in Stockton, California

The Wall Street Journal: Franklin, CalPERS Clash on Stockton Pension Issue

Reuters: Judge to make final ruling on Stockton bankruptcy late October

Mercury News: Lawyer warns of 60 percent pension cuts in Stockton bankruptcy case

Definition of persiflage

Opt In Image
Soak Up More Light from the Right
with a free copy of Bob's most popular eBook!

Sign up to to receive Bob's explosive articles in your inbox every week, and as a thank you we'll send a copy of his most popular eBook - completely free of charge!

How can you help stop the Democrat's latest gun grab? How is the Federal Reserve deceiving America today? What is the latest Obama administration scandal coverup? Sign up for the Light from the Right email newsletter and help stop the progressives' takeover of America!