Public pensions can be fair game when a city government declares bankruptcy under federal law, the federal judge overseeing Stockton, Calif.’s bankruptcy has ruled.
U.S. Bankruptcy Judge Christopher Klein ruled Oct. 8 that the U.S. Constitution’s Supremacy Clause trumps California’s public employee retirement law, and therefore federal bankruptcy and contract law applies to Stockton’s pension fund. That means that the city’s pension debt must be treated in the same way as any other debt and can be adjusted due to Stockton’s bankruptcy.
Back in May, Klein implied that cutting Stockton’s pension obligations was not off the table — perhaps following the lead of the federal judge overseeing the Detroit bankruptcy proceedings. On Dec. 3, 2013, Bankruptcy Court Judge Steven W. Rhodes ruled that Detroit did not have to honor its pension obligations, noting that Michigan could have guaranteed pension benefits, but did not. At the time, Harvey L. Leiderman, CalPERS’ counsel, argued that Detroit’s bankruptcy and the subsequent treatment of its pension obligations would not be a precedent for the treatment of any municipal bankruptcies in California. Leiderman based this reasoning on the fact that Detroit city employees’ pensions were protected by a contract, while municipal pensions in California are protected by state law. Now Judge Klein has found that California law is not sufficient to safeguard Stockton’s pension obligations from the reach of federal bankruptcy law.
