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Judge: Stockton must pay creditors and pension fund

A federal judge has ruled that Stockton, California, must follow U.S. bankruptcy laws
People walk into Stockton City Hall on June 27, 2012 in Stockton, California. Members of the Stockton city council voted 6-1 on Tuesday to adopt a spending plan for operating under Chapter 9 bankruptcy protection following failed talks with bondholders and labor unions failed. The move will make Stockton the biggest U.S. city to file for bankruptcy protection from creditors.

SACRAMENTO - A federal judge has ruled that Stockton, California, must follow U.S. bankruptcy laws and pay its creditors as well as its pension fund.

The ruling came Wednesday in a case filed against Stockton by a key creditor, Franklin Templeton Investments.

The case is being closely watched because it could answer the significant question of who gets paid first by financially strapped cities around the nation - retirement funds or creditors.

Much of the case centers on whether Stockton's payments to the California Public Employees' Retirement System are off limits to creditors as the city tries to end its Chapter 9 protection.

LIVE BLOG: Stockton bankruptcy exit plan announcement

Franklin Templeton Investments says the pension payments are fair game as it tries to collect on an unsecured $32.5 million claim against the city.

Stockton city Manager Kurt Wilson and its attorney declined immediate comment as the city prepared to present its overall bankruptcy exit plan to the same federal judge.

Before the end of the hearing Wednesday evening, the judge said he needed more time to look over the city's bankruptcy exit plan before making his ruling on it. He said he will announce his decision on Oct. 30.

No one is watching Stockton's bankruptcy proceedings closer than Dwane Milnes. The retired Stockton City Manager is not only a CalPERS pensioner himself, he's the president of the city's Association of Retired Employees. He is quick to point out that just because the judge ruled Stockton has the capacity to cut pensions, it's shown no sign of having the will to do so.

"The city bankruptcy plan does not affect retiree pensions," Milnes said. "The city has been adamant that they do not want to affect retiree pensions because of the impact on their ability to recruit and retain employees."

Nonetheless, Milnes is concerned the judge has opened the door for cities to consider pensions fair game in bankruptcy.

"I'm bothered by that. I think all of us assumed when we go to work in public employment that retirement is like deferred income, and that that's part of why and how you work for public employment," Milnes said.

Sacramento State visiting scholar Bob Benedetti who studies municipal bankruptcies in California said the court's interpretation changes workers' outlook on pensions.

"Employees are going to have to be more on guard – and unions as well – in terms of getting protections for pensions. Before this, one thought that if one won a pension at the bargaining table, it was secure," Benedetti told Capital Public Radio.

For now, Milnes is telling retirees it's highly unlikely their pensions are at risk, but he can't help keep his confidence in check.

"I hesitate to say I'm pretty confident. My current reading is that the city will retain that position," Milnes said.

Milnes insists even if the judge were to ultimately rule against Stockton's current financial reorganization plan, pensioners can take comfort in knowing that city leaders still have options other than cutting pensions.