July 8 (Bloomberg) -- The California Public Employees’ Retirement System may not be a creditor with collateral rights over a city’s assets, the judge overseeing Stockton’s bankruptcy said today during a court hearing.
U.S. Bankruptcy Judge Christopher Klein questioned two of Calpers’ main claims in Stockton’s reorganization and asked it to respond in writing. Stockton designed its bankruptcy exit plan assuming that Calpers would hold a $1.5 billion lien on city assets if the city canceled its pension contract.
“Everybody has assumed that this $1.5 billion lien is valid,” Klein said today in court. A review of the law “makes me wonder whether this so-called lien could be enforced.”
Franklin Resources Inc. has attacked the bankruptcy exit plan, arguing the proposal is unfair because it fully pays Calpers and city pensioners while giving two Franklin funds as little as 1 percent of the $36 million they are owed.
Klein scheduled another hearing for Oct. 1, when he may rule on the bankruptcy exit plan. Previously, he had said he may rule on the plan by the end of July.
Stockton, a city of 298,000 about 80 miles (130 kilometers) east of San Francisco, filed for bankruptcy in 2012 after spending too much on downtown improvement projects and seeing its property-tax revenue plunge in the housing crisis. Creditors filed $1.18 billion in claims.
After months of negotiations with the help of a court-appointed mediator, Stockton cut deals with most creditors, including bond insurer Assured Guaranty Corp. and current and retired city workers, who claimed cuts to retiree health care would cost them $545 million over their lifetimes.
Franklin refused to settle, arguing that payments to Calpers, which are used to fund city worker pensions, must be cut in order for the plan to treat all creditors fairly.
Klein’s comments challenge the special status that Calpers has claimed in court papers. Calpers argued that state law gives it special priority in bankruptcy and that it would be owed $1.5 billion to fund future pension obligations to Stockton’s retirees if the city didn’t pay it in full.
The case is In re Stockton, 12-bk-32118, U.S. Bankruptcy Court, Eastern District of California (Sacramento).
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