Pension Reform

By Ed Mendel
Monday, April 21, 2014

With a new twist, Stockton’s plan to leave a huge pension debt untouched was still an issue last week as the city council, hoping to end a two-year bankruptcy, approved settlements for 95 percent of the claims.

The settlements include Assured Guaranty and National Public Finance Guarantee, the main opponents of Stockton’s eligibility for bankruptcy. The bond insurers argued that an early plan to cut bond debt, but not pension debt, treated creditors unfairly.

Now the last major creditor that has not settled, Franklin Bonds, argues that if Stockton exits bankruptcy without cutting pension debt, the city could slide back toward insolvency like Vallejo.

A trial is scheduled May 12 if the city and Franklin do not reach an agreement. While Assured and National recover most if not all of their money under the exit plan, Franklin issued an unsecured loan and would receive $94,000 for a $37 million debt.

A Wall Street credit rating agency, Moody’s, said in February that without pension relief Vallejo, which emerged from bankruptcy in November 2011, and the two cities currently in bankruptcy, Stockton and San Bernardino, risk returning to insolvency.

Last month U.S. Bankruptcy Judge Christopher Klein said he has seen news reports about Vallejo’s budget problems and wants to be sure that if Stockton exits bankruptcy without addressing pensions, the city will not face a second insolvency.

Not mentioning Vallejo, Klein made a similar remark at a hearing last November: “If I thought there was going to have to be another Chapter 9 (bankruptcy) case in 10 years, I probably would not confirm the plan. I’m not sure any judge would.”

In January a deputy city manager, Kurt Wilson, was promoted to city manager to replace the architect of the Stockton bankruptcy, Bob Deis, who retired. Deis said pensions are needed to be competitive in the job marketplace, particularly for police.

Vallejo officials said they considered trying to cut pension debt, but did not after CalPERS threatened a costly legal battle. The Stockton plan eliminates retiree health care, replacing a $546 million long-term debt with a $5 million lump-sum payment.

“You directed us to make sure that if we were going to endure this painful process of bankruptcy, we were going to do it in a way that meant we would never come back to bankruptcy,” Wilson told the council last week.

The Stockton exit plan, approved by most of the creditors, shows pension costs rising from about 10 percent of the general fund to near 20 percent by the end of the decade, where it remains for another decade before beginning a long drop.

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