The judge in Stockton, Calif.'s bankruptcy case has approved the city's plan to exit bankruptcy without impairing the California Public Employees Retirement System.
"This plan, I'm persuaded, is the best that can be done in terms of restructuring the city's debts," said U.S. Bankruptcy Judge Christopher Klein during the confirmation hearing in Sacramento Thursday.
Earlier this month, Klein ruled that it would be legal under federal bankruptcy law to reject Stockton's contract with CalPERS to provide pensions for city employees.
He also said that the $1.6 billion termination fee CalPERS said it would charge to break the contract would be avoidable in bankruptcy.
The city had never sought to break its contract, and Klein declined Thursday to impose such a ruling, noting that the real creditors impacted in such a ruling would be the city's retirees, who gave up retiree health care benefits valued at more than a half-billion dollars during the bankruptcy.
"The biggest creditor isn't CalPERS, it's the employees with pensions, if one wants to treat pensions as a claim," Klein said, adding that these employees would be the real victims of any adjustment.
CalPERS said that it was pleased that Stockton can emerge from bankruptcy and that it would continue to protect "pension promises" made to its public employees.
"The judge recognized that the city's employees and retirees have already made significant concessions with respect to their pension and health benefits and that further impairing pensions would harm them even more," Anne Stausboll, chief executive officer of CalPERS, said in a statement. "The city has made a smart decision to protect pensions and find a reasonable path forward to a more fiscally sustainable future."
During the final day of a confirmation hearing that stretched over seven months, Klein went through the series of hurdles the city needs to pass in order to exit Chapter 9 bankruptcy, saying Stockton has satisfied each one.
In particular, he said there are "adequate means" for plan implementation and that the city can continue operationsmade possible by a sales tax increase approved by voters a year ago.
Klein also said the city's plan was made in "good faith" and that it is feasible and in the best interest of creditors.
"I've looked long and hard at the history of this case and the responses that have been made and considered the alternatives, including putting the whole situation back to square one," Klein said, noting that such alternative would cost the city even more money.
According to the city, it has spent around $13 million on fees associated with the bankruptcy case, including $10 million in legal fees to Orrick, Herrington & Sutcliffe LLP.
By comparison, the city of Detroit has paid $137 million in bankruptcy fees, with $53 million going to its law firm, Jones Day.
Klein said this should be a less to other municipalities who can expect to pay an amount in the eight digits in bankruptcy fees.
"Nobody should think bankruptcy is an easy and inexpensive process," he said.
The judge overruled objections made by Franklin Advisors, Inc., the only creditor with which Stockton had not reached an agreement on its exit plan. Franklin said the city unfairly discriminating against it by treating other creditors more favorably.
Under the plan, Franklin would take a significant loss on $35 million of bonds it holds, which would amount to a recovery rate of only 1%, the firm said.
Klein, however, said Thursday that after taking into account a $4 million payment from the city on a secured claim, the recovery rate would be closer to 12%.
Franklin attorney James Johnston of Jones Day said they are "obviously disappointed by the ruling" and will consider their next steps.
They have 14 days after the judge files his order to revisit anything in the case.
In the meantime, Stockton attorney Marc Levinson of Orrick said the city will file a total of about five and a half pages of confirmation paperwork next week, which it has already started on.
The city filed for bankruptcy in June 2012.
Tonya Chin writes for Bond Buyer, a SourceMedia publication.
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