By Dan Walters
Published: Monday, Sep. 16, 2013 – 12:00 am
As federal bankruptcy judges deal with the insolvencies of two medium-size California cities, Stockton and San Bernardino, and the huge fiscal collapse of Detroit, they are confronting an issue with almost incalculable impacts – whether public employee pensions are ordinary debts or enjoy special protections.
Stockton excluded pensions from the list of debts it wants to reduce, leaving bondholders and their insurers as the city’s targets for financial haircuts as it writes a plan to put its finances back in the black.
The bond creditors opposed the city’s bankruptcy petition because it excluded pensions as debts to be reduced and won support from the California Public Employees’ Retirement System.
The judge handling Stockton’s case, Christopher Klein, overruled the creditors’ claims, but has indicated that the city may still be compelled to include pensions.
The dynamics of San Bernardino’s case are exactly opposite. That city wants to reduce its pension obligations in bankruptcy, and CalPERS opposed its bankruptcy petition for that reason, arguing, as it did in Stockton’s case, that pensions have special legal protections.
However, the San Bernardino case’s judge, Meredith Jury, rejected CalPERS’ position, declaring that the city could proceed with a “term sheet” outlining its plan to regain solvency.
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