By Ed Mendel
February 16, 2015

CalPERS has paid two law firms more than $7 million in the Vallejo, Stockton and San Bernardino bankruptcies, even though a federal judge doubts that it has the legal standing to object to city pension cuts.

The high-priced legal representation, at top rates of $530 an hour, did not dissuade the judge in the Stockton case from ruling that CalPERS pensions can be cut in bankruptcy like other debt.

But Vallejo did not try to cut pensions, reportedly fearing a costly legal battle threatened by CalPERS. Stockton did not want to cut pensions, leaving the CalPERS issue to bondholders. And a San Bernardino deal with CalPERS protects pensions.

At times in the Stockton case, Judge Christopher Klein verbally jabbed the CalPERS attorney, Michael Gearin (once said to be “bellowing and pawing the sidelines”), as if he were an over-blown nuisance of questionable relevance.

The judge was explicit this month when, after an oral ruling in October, he issued a 54-page written ruling that confirms Stockton’s plan to exit bankruptcy and explains why, despite past CalPERS defensive measures, pensions can be cut in bankruptcy.

“As CalPERS does not guaranty payment of municipal pensions and has a connection with a municipality only if that municipality elects to contract with CalPERS to service its pensions, its standing to object to a municipal pension modification through chapter 9 (bankruptcy) appears to be lacking,” Klein wrote.

After a federal judge ruled in the Detroit bankruptcy that pensions can be cut, CalPERS joined unions in an appeal, arguing that it’s an “arm of the state” not a city-run plan like Detroit, and thus is protected under the federal bankruptcy law for cities.

Klein ruled that Stockton has contracts with unions and CalPERS. He said the “third leg” of the triangle, the relationship between CalPERS and active and retired employees, is not a contract but a “third-party beneficiary relationship.”

Contrary to the widespread “myth” that CalPERS is Stockton’s largest creditor, the judge said, it’s a “small-potatoes creditor” and “pass-through conduit” only owed administrative expenses. The big pension debt is owed to employees and retirees.

Nothing about state structure or procedure “necessitates” CalPERS, the judge said. State law does not require that city employees have pensions. And cities can choose other pension providers: private, county or the creation of their own system.

But once a city contracts with CalPERS two state laws sponsored by CalPERS, which do not apply to county or city retirement systems, make it difficult to leave the big state system.

One state law bars rejection of CalPERS contracts in bankruptcy. The judge said states cannot modify federal law and cited, among other things, a Texas law allowing a school bankruptcy if state bonds were protected, which was overturned by the courts.

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