US Bankruptcy Court

By Marc Lifsher and Melody Petersen
October 29, 2014

In a closely watched case, a federal judge on Thursday is expected to decide whether the bankrupt city of Stockton can continue to pay employees generous pensions that soon could consume one-fifth of municipal revenues.

The ruling has been much anticipated since U.S. Bankruptcy Judge Christopher M. Klein recently said that California’s rich and powerful public pension system should be treated like all other creditors — with no special protection.

His comments stunned state and local officials and public employee unions, who had long considered pensions untouchable, even in bankruptcy.

But Thursday’s ruling may not be as far-reaching as the judge hinted. Despite his qualms, Klein could approve Stockton’s city-approved plan for ending its bankruptcy. It calls for more cuts in public services — but preserves current employee pension benefits.

In contrast, a decision by Klein to reject Stockton’s plan — opening the door for the city to slash retirement checks — “would create shock waves throughout California” and to a lesser degree across the country, said Michelle Wilde Anderson, a Stanford Law School professor who specializes in local government and finance.

“It would have immediate implications,” she said. “First and foremost, Stockton retirees would see pension benefits reduced.”

Meanwhile, San Bernardino, another bankrupt California city, might decide not to honor its commitments to the California Public Employees’ Retirement System. And other fiscally shaky cities might seek bankruptcy protection so they could get out from under pension liabilities.

In recent years, pensions have been a political hot potato in Stockton. Overly large pensions approved by city officials for employees are among the reasons Stockton found it could no longer pay its bills, critics say.

In court, the city has repeatedly argued that employees have suffered enough in the bankruptcy. The city no longer gives retirees free medical care.

Salaries have been cut for some employees by as much as 23%. New hires now get sharply reduced pensions. Many of the bonuses have been eliminated. And employees must now pay for part of their pensions — rather than having the city pick up their share.

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