The California Public Employee’s Retirement System, also known as CalPERS, could be forced to absorb loses in Stockton’s bankruptcy trial.

Recently, U.S. Bankruptcy Judge Christopher Klein, ruled that the city’s contract with Calpers could be rejected, but has not ruled that it must absorb loses as part of the city’s financial restructuring.

Stockton Bankruptcy

Stockton filed for bankruptcy two years ago. It was the largest city in U.S. history to file for Chapter 9 protection until Detroit filed for bankruptcy last year.  Chapter 9 provides financially distressed municipalities, such as cities, counties, and towns with protection from creditors through the creation of a plan to resolve outstanding debt owed to creditors.  

CalPERS Responds

CalPERS disagreed with Judge Klein’s opinion regarding pension impairment. In a public statement, the company said, “This ruling is not legally binding on any of the parties in the Stockton case or as precedent in any other bankruptcy proceeding…,”

This ruling is similar to the determination made in Detroit’s bankruptcy case. In that case, the judge ruled pensions could also be forced to absorb losses along with other creditors.

The issued of imposing payment reductions to CalPERS has been an issue that Klein has wrestled with throughout the case.

Retirees Already Struggling

Attorney for Stockton, Marc Levinson argued the city has already reduced health benefits to retirees. “They lost their health benefits. They felt pain immediately,” Levinson said.

“Employees have an incentive to leave and they have an incentive to leave in six months,” Levinson said. “The fear in the city is real.”