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Judge says city in bankruptcy can alter its agreements with pensioners

Charlotte Bankruptcy Lawyer Bryan W. Stone of Arnold & Smith, PLLC answers the question “Are my 401k and IRA protected in bankruptcy?”

 

Detroit is not the only bankrupt city in the United States. Detroit’s municipal bankruptcy may be the largest of its kind, but the decision United States Bankruptcy Judge Christopher Klein made yesterday in Stockton, California’s bankruptcy may impact millions of workers as well as investors and municipalities across the United States.

Stockton California Mecklenburg Bankruptcy Lawyer North Carolina Chapter 13 AttorneyIn what the Wall Street Journal hails as “a landmark decision,” Judge Klein ruled that Stockton could sever its ties with California’s Public Employees’ Retirement System. He cited a section in the Bankruptcy Code that provides that bankrupt cities and companies can break contracts. It is one of bankruptcy law’s core powers, and through it, Judge Klein said, “Pensions could be adjusted.”

City employees and their employers, over time, can set aside money—usually tax exempt—for employees to use for their future benefit, usually after they retire. The terms of a pension—and how much an employee expects to see returned to him or her over the course of a retirement—are set forth in a contract between a city and its employees. Most cities—Stockton included—engage a third party to invest the pension money and obtain the best possible return on it.

California’s Public Employee’s Retirement System is in charge of retirement money for most municipal workers in California, controlling some $294 billion in assets. Stockton contributes about $30 million per year to the fund. The retirement system argued in Stockton’s bankruptcy that pension payments to workers are guaranteed by California state law and could not be cut. Judge Klein disagreed.

Stockton already cut its workforce by 30-percent before it even filed for bankruptcy. It also offloaded health care obligations to 1,000 workers and retirees who had some $538 million in claims against the city. The workers and retirees decided to accept one-time payments worth a total of $5.1 million instead.

In a Thursday column, Michael Hiltzik of the Los Angeles Times wrote that the real victims of Judge Klein’s ruling are some 2,400 retirees whose income will be “eviscerated” if investment houses that have opposed Stockton’s proposal to emerge from bankruptcy get their way. Many of Stockton’s obligations to investment-house creditors are unsecured. The investment houses want pensioners treated the same way—as unsecured creditors whose contracts are conditional, or subject to alteration in bankruptcy.

Hiltzik pointed out that investment funds can diversify their portfolio to hedge against the risk that some bond issuers (like Stockton) might fail. Employees—pensioners—on the other hand, can’t take several jobs at once—and thereby several pensions—in order to guard against the risk that one or more of their employers might default on their pension obligations.

In the end, Hiltzik writes, the blame is on Stockton itself, which assumed when it took on its pension obligations that the good economy would continue in perpetuity. He said Stockton should never have entered bankruptcy, where it has now lost all control over its destiny.

The implications of Judge Klein’s decision are still reverberating. Many other cities contemplating bankruptcy may now realize that through the bankruptcy process, they can unload costly pension obligations. If Hiltzik is right, workers, retirees and pensioners by the million may soon be feeling the pain.

If you find yourself needing the services of a Charlotte, North Carolina bankruptcy attorney, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with the best advice for your particular situation.

 

 

About the Author

Bryan 1Bryan Stone is a Partner with Arnold & Smith, PLLC, where he focuses his practice on all aspects of bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.

A native of Macon, Georgia, Mr. Stone attended the University of Georgia, where he earned a BBA in Banking and Finance, and Wake Forest University School of Law, where he obtained his law degree.

Following law school, Mr. Stone relocated to Charlotte, where he currently serves as Chair of “Bravo!” – a young professionals organization associated with Opera Carolina – and founded the University of Georgia Alumni Association of Charlotte.

In his spare time, Mr. Stone enjoys perfecting his barbeque skills for the annual “Q-City BBQ Championship” and playing softball in the Mecklenburg County Bar softball league.

 

 

Sources:

http://www.latimes.com/business/hiltzik/la-fi-mh-in-stockton-bankruptcy-case-20141002-column.html#page=1

http://online.wsj.com/articles/judge-says-cities-in-bankruptcy-may-reject-pension-contracts-1412202138

http://online.wsj.com/articles/judge-says-cities-in-bankruptcy-may-reject-pension-contracts-1412202138

 

 

Image Credit:

http://commons.wikimedia.org/wiki/File:Downtown_Stockton_California.jpg

 

 

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