Bankruptcy Judge Christopher Klein’s opinion last week confirming the city of Stockton, Calif.’s bankruptcy exit plan is as incisive in its rebuke of the California Public Employees’ Retirement System (CalPERS) as it is instructive about U.S. bankruptcy law, according to an editorial in today’s Wall Street Journal. Stockton declared chapter 9 bankruptcy in 2012, and it has since rewritten labor contracts and asked creditors for writedowns. Yet after being browbeaten by CalPERS, the giant public-pension fund, the city held pensions harmless, according to the editorial. CalPERS argued that the California constitution’s guarantee of contracts shielded pensions from cuts in bankruptcy. The fund also asserted sovereign immunity and police powers as an “arm of the state,” including a lien on municipal assets. Judge Klein upheld Stockton’s bankruptcy plan but not before effectively throwing CalPERS out of court. “It is doubtful that CalPERS even has standing,” he writes. “It does not bear financial risk from reductions by the City in its funding payments because state law requires CalPERS to pass along the reductions to pensioners in the form of reduced pensions.” As the judge explains, “CalPERS has bullied its way about in this case with an iron fist.” Calpers’s arguments are “constitutionally infirm in the face of the exclusive power of Congress to enact uniform laws on the subject of bankruptcy under Article I, Section 8, of the U.S. Constitution—the essence of which laws is the impairment of contracts—and of the Supremacy Clause.”
