Stockton wins confirmation on adjustment plan with pension treatment

By Kali Hays and Caroline Salls

New York, Oct. 30 – The City of Stockton, Calif., received confirmation of its Chapter 9 plan of adjustment on Thursday according to an entry with the U.S. Bankruptcy Court for the Eastern District of California.

As previously reported, the city faced staunch opposition to the plan from Franklin High Yield Tax-Free Income Fund and Franklin California High Yield Municipal Fund, which have a combined claim of $35 million against Stockton.

The adjustment plan allows Franklin to recover about $4 million of its claim and treatment the creditor derided as unfair under the Bankruptcy Code as current pensions of city workers’ stand to be paid in full.

According to Stockton, if it were to cut into pensions in order to reduce its debt, its participation in California Public Employees’ Retirement System (CalPERS) would be terminated causing a 60% reduction overall on employee pensions and allowing CalPERS a $1.6 billion lien against the city.

In an Oct. 2 status conference, judge Christopher Klein ruled that the city is able to impair its pension obligations as its relationship with CalPERS is contractual and, as such, is subject to cancellation within a municipal bankruptcy case.

However, during the status conference judge Klein did not say that impairing the pension obligations would be in the best interest of the city.

Changes to the proposed adjustment plan were not ordered prior to confirmation.

According to the disclosure statement for the plan, which was filed in October 2013, the plan significantly impairs the health benefits of former employees and retirees. Retiree health benefits worth roughly $1 billion for current employees were eliminated as a result of negotiated agreements.

The city said it intends to fully fund the contributions to be made for the reduced pension benefits of employees. Those pension contributions will continue to be made to CalPERS in its capacity as pension trustee.

Payment to holders of general unsecured claims, including bondholders, retiree health benefit claimants and leave buyout claimants, will receive cash equal to an unspecified percentage of the claims.

Stockton said the plan does not alter the obligations of city funds that are restricted by grants, by federal law, or by California law, as those funds cannot be impacted in the Chapter 9 case. As a result, securities payable solely from restricted funds are not altered by the plan.

Stockton filed for bankruptcy on June 28, 2012 under Chapter 9 case number 12-32118.

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