MuniLand – The Bully Has a Glass Jaw

In February, Federal Bankruptcy Judge Klein issued the opinion regarding confirmation and status between the California Public Employees Retirement System (CalPERS) and Stockton, CA. That opinion provides valuable insight into the subordination of bonded debt versus pension liabilities because CalPERS was arguing their senior status in the case. First, California statute forbidding the rejection of municipal contracts with CalPERS is weak in light of Federal bankruptcy laws. CalPERS argued that California municipalities could not reject a contract. Second, termination liens granted to CalPERS by the State can be circumvented in Federal bankruptcy court. A termination lien is the cost to a municipality for switching from CalPERS to a different provider of pension administration. Third, the “Vested Rights Doctrine” does not prevent contract rejection or modification in Federal bankruptcy court. What this means is it is not within the power of a legislature to take away rights that have been once vested by a judgment. Fourth, and last, state sovereignty rights do not dictate different results, meaning Federal Bankruptcy laws usurp state law. Judge Klein goes on to explain his opinion in less judicial terms. He writes, “CalPERS has bullied its way about in this case with an iron fist…The bully may have an iron first, but it also turns out to have a glass jaw.”  You don’t need a JD to understand Judge Klein’s opinion. Pension benefits guaranteed by state constitution are weak, in his opinion, in Federal Bankruptcy. We cannot infer from the opinion that bonded debt is on equal terms with pension liabilities. On the contrary, in the Stockton and Detroit bankruptcy cases pensioners and current employees received fewer benefits than originally promised. Judge Klein’s opinion is a wakeup call to all interested parties that it is better to pursue collaborative resolution before considering bankruptcy as an option.

Sources: SNWAM Research, U.S. Bankruptcy Court (Eastern District of CA) filings