Both the city of Stockton and Calpers, California’s state pension system, must be down in the dumps today. Yesterday, the judge overseeing Stockton’s attempt to exit bankruptcy ruled that the city’s collateral wasn’t worthless (as its government had claimed), but worth around $4 million—to be paid to the city’s holdout creditor, Franklin Templeton Investments. The company has refused to accept the debt restructuring that would have returned less than a penny for every dollar of their $35 million loan.But the question that has everyone on the edge of their seats is this: Will the judge rule that Calpers has to take a hit, and see its pension contributions from Stockton reduced? While he didn’t make his decision yesterday, what he did say must have Calpers more than a bit anxious. Reuters:
[U.S. Bankruptcy Judge Christopher] Klein questioned a $1.6 billion termination fee that Calpers has said it could impose on Stockton if the city ended its contract with the $285.2 billion pension fund.“It really makes me wonder whether this so-called lien is the kind of thing that could be enforced,” said Klein. “I’m going to need some explanation about why I should take that lien seriously.”
Klein scheduled the next hearing on the case for October, when he will rule on whether the city can reduce its contribution to the fund. Meanwhile, Detroit, which has moved to reduce pension contributions as part of its bankruptcy proceedings, is slated to go to court later this summer. And while Calpers has argued that the Detroit case has no bearing on California law, all parties in the Stockton fight are sure to be watching the Motor City showdown.