Wednesday, 3 April 2013

Could Stockton Bankrtupcy Case Threaten Proposition 13?

As the Stockton bankruptcy case moves into the next phase, two questions will loom large:
1.  Does the City’s plan of adjustment treat similarly situated creditors equitably?
2.  Can Federal bankruptcy law invalidate state laws?

These are the headline issues because the bond insurers argue that pensions, protected by state law, should be adjusted in the City’s bankruptcy.

CalPers made an interesting response to this argument in a recent op-ed in the Sacramento Bee titled “CalPers Protects State Constitution.”

  In bankruptcy court, the bondholder creditors – and their insurers – are seeking to use the power of the federal government to invalidate this decision of the city. These creditors have argued that federal bankruptcy laws allow the court to ignore California law and to impose a type of “pension reform” on the city, against its will.

The legal dispute is not over the level of benefits provided to city workers; instead, it will turn on a much broader issue: the ability of the federal government to invalidate laws enacted by California that govern its cities, their pension plans and the pension benefits provided to public workers…. 

We also shouldn’t ignore the inherent danger in accepting the arguments made by bondholders and their brethren insurers. If the bankruptcy court can invalidate state laws governing pensions, then why not other state laws? For example, why not Proposition 13? Of course, raising taxes would be in the interest of these creditors and they have argued that the city should be thrown out of bankruptcy court because it failed to increase taxes. 
I wonder if this foreshadows where CalPers will take the bankruptcy case if creditors are successful in their argument that pensions can be cut despite state law.  Will CalPers make the argument that property taxes should be raised above Proposition 13 limitations if the City isn’t constrained by state law in federal bankruptcy protection?  Would the City itself even argue that it prefers property tax increases to pension cuts in this case?

Update:  I should note that I am not a lawyer, and just found this to be an interesting argument I have not seen elsewhere.  This argument about invalidating Prop. 13 may be a good political argument, but a weak legal one.  It could be that the federal bankruptcy law is limited in its scope to impairing contracts and would not have broader applicability.  This case is going to get more interesting as it progresses.

About the Author

Ethan Jacob

Author & Editor

I am Ethan Jacob Executive Director of the Center for Business and Policy Research at the University of the Pacific, where I have a joint faculty appointment in the Eberhardt School of Business and the Public Policy Program in the McGeorge School of Law..

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