Stockton bankruptcy judge to decide if pensions should share losses

By Robin Respaut

SACRAMENTO, Calif. Tue May 13, 2014 10:17pm EDT

SACRAMENTO, Calif. May 13 (Reuters) - The judge presiding over Stockton, California's bankruptcy case on Tuesday said he will question officials from Calpers to determine whether the nation's largest pension fund can be forced to take losses in the case along with other creditors.

Describing the thorny question of whether the California Public Employees' Retirement System should remain whole while other creditors absorb steep losses as a "festering sore," U.S. Bankruptcy Court Judge Christopher Klein said he needed to consider alternatives for the matter. Calpers contends its protected status is guaranteed under law, and Stockton, which declared bankruptcy nearly two years ago, has not tried to impose any losses on the $285.2 billion pension fund.

"We have a festering sore here. We got to get in there and excise it and figure out what the story is. Maybe Calpers is correct, maybe not," Klein said, in a dramatic turn in a trial that began on Monday.

A decision that Calpers could be impaired has wide-ranging implications for public employee pensions across the country and comes as a handful of distressed cities battle their way through insolvency proceedings. In December, U.S. Bankruptcy Court Judge Steven Rhodes ruled Detroit may legally reduce public pension benefits, despite Michigan's constitutional protection of public pensions. In southern California, the city of San Bernardino is currently in mediation with Calpers.

The attorney for Calpers, Michael Gearin, suggested the court should not consider plans other than the one presented by the city, which left pensions untouched.

"There is a bit of the cart before the horse here," said Gearin. "What we are in jeopardy of is embroiling the city in a messy problem that the city does not want to be embroiled in."

But Judge Klein said he would be rubber stamping the city's proposal if he did not consider the alternatives.

Stockton has avoided impairing Calpers, fearing a $1.6 billion termination fee, and "the real and palpable belief that if we take on pensions, we lose employees," said Stockton attorney Marc Levinson.

In the second day of trial to determine if Stockton can exit bankruptcy, proceedings mainly centered around the city's holdout creditor, two funds managed by Franklin Templeton Investments, which is poised to receive less than a penny on the dollar under the city's plan.

Attorneys for Franklin pressed its case that it is being treated unfairly. They refuted the testimony of Stockton Economic Development Advisor Val Toppenberg, who said the golf courses and ice arena it built with money raised from Franklin's $35 million bonds are worthless. Toppenberg conceded the city had reached that conclusion without the assistance of professional appraisers.

"I was able to subtract zero from zero," said Toppenberg, noting that the properties have operated at an aggregate loss for the last eight years.

Franklin highlighted that the city is planning to use public facility fees, revenue that could be used to pay back Franklin's bonds, on other projects and, in part, to pay its bankruptcy lawyers.

"There is room for the city to pay Franklin a heck of a lot more than a penny on the dollar," said James Johnston, attorney for Franklin.

The trial is scheduled to last through Thursday, but Stockton could remain in Chapter 9 protection if the judge does not find the city's plan to exit bankruptcy is fair and feasible. (Reporting by Robin Respaut; Editing by Lisa Shumaker)

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