Dan Walters

By Dan Walters
Published: Monday, Jul. 14, 2014 – 12:00 am

Ever since Stockton filed for bankruptcy two years ago, Judge Christopher Klein has strongly hinted that he’s willing – perhaps even eager – to declare that city employee pension obligations are debts that could be trimmed along with those of more conventional creditors.

“We have a festering sore here,” Klein said earlier this year. “We got to get in there and excise it and figure out what the story is.”

Klein’s obvious leanings have drawn strenuous objections from the California Public Employees Retirement System (CalPERS). It has advanced several legal theories as to why pensions should be exempted from the haircuts other creditors are taking.

At first, it relied on a section of the state constitution prohibiting the impairment of contracts, but Klein undermined that theory when he reminded attorneys, “bankruptcy is nothing but the impairment of contracts.”

When Detroit filed for bankruptcy, the judge in its case flatly declared that pension obligations would be treated like other debts and could be modified. But CalPERS insisted that California was different because it is a state agency and therefore has sovereign immunity.

Last week, however, Klein more or less dismissed that argument as he indicated again that he’s inclined to declare pensions to be fair game in bankruptcy proceedings.

The real creditors on pensions are the current and potential city retirees while CalPERS “is in effect a servicing agency,” Klein said.

San Bernardino, after initially saying it wanted to reduce pension debts in its bankruptcy and incurring CalPERS’ wrath, has shifted and has a recovery plan that doesn’t include pension cuts.

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