Modifying or Terminating Pension Plans through Chapter 9 Bankruptcies with a Focus on California

Article excerpt

Introduction   I. An Overview of Chapter 9 and Pensions in Chapter 11        Generally      A. Chapter 9 Bankruptcy Generally      B. Treatment of Pensions in Chapter 11 Bankruptcy      C. Added Complications of Chapter 9      D. California as the Focus  II. Federal Law v. State Law and the Nature of Pension Plans      A. Federalism Issues in Chapter 9: Where State and         Federal Powers Conflict      B. Various State Law Perspectives on the Nature of         Pension Plans and Their Ability to be Modified in         Bankruptcy      C. Whether a Pension Plan is an Executory Contract: The         Countryman Test      D. Rejection as a Prepetition Breach of Contract      E. Federalism Issues Regarding Treatment of the         Pension Plan as a Prepetition Breach of Contract         Claim         1. Treatment Under California State Labor Law         2. Treatment Under Federal Bankruptcy Law III. Pension Plans May Be Rejected as Executory Contracts Conclusion 

INTRODUCTION

When Stockton, California, a city of just under 300,000 people, filed for Chapter 9 protection on June 28, 2012, (1) it became the largest U.S. city by population to do so. (2) Like other municipalities, Stockton has been greatly affected by the collapse of the sub-prime lending market from 2007 to 2008. (3) Stockton, however, was disproportionately affected because of its location in the Central Valley region of California, an attractive location for those who want to live near the Bay area, with one out of every thirty homes in foreclosure. (4) The high foreclosure rate, coupled with declining home values, has decreased Stockton's tax revenue from property taxes. (5) Because of this decrease in tax revenue, the city has had difficulties repaying obligations to creditors as they become due. (6) In order to meet its obligations, Stockton has been forced to cut the services it provides to citizens to the bare minimum required to maintain the city. (7) Although Stockton has been ranked as the second most dangerous city in California, second only to Oakland, and one of the ten most dangerous cities in America, it has had to slash its police force by twenty-five percent to cut costs. (8) Stockton was also named America's most miserable city by Forbes in 2011. (9) Citizens who are able to leave the city are doing so as a result, sending Stockton into a downward spiral with even more decreases in revenue from property taxes. (10) After rounds of failed negotiations with creditors, required by Section 53760 of the California Government Code, Stockton filed for Chapter 9 protection to solve its fiscal crisis. (11) The California Public Employees' Retirement System (CalPERS), a state executive agency that manages pension and health benefits for California's public employees, retirees, and their families, (12) is Stockton's largest creditor, with a contingent, unliquidated claim of over $147 million. (13) This obligation is an obstacle to a city that is trying to provide for its citizens, meet other debt obligations, and maintain some form of credit in order to borrow in the future.

The story of Stockton is not unlike that of many other U.S. cities. Municipalities have mounting obligations as a result of providing services, building infrastructure, paying payroll, and contributing to benefits for city employees. (14) The economic recession and collapse of real estate values reduced the tax base and tax revenues generated at the local level with lower property values translating to decreased property taxes. (15) The result is a lower municipal income and tighter budget constraints. (16) The high foreclosure rate reduces the value of the property foreclosed upon and that of surrounding properties. There is also less federal funding to states, which means less state funding for municipalities. Some municipalities operate on short-term financing, borrowing money in the form of bonds in order to pay for current obligations. (17) These municipalities need to continuously borrow money in order to meet those obligations. …