ACRAMENTO, Calif. — A federal judge has struck a blow against the sanctity of public pensions in California by ruling that U.S. bankruptcy law permits the city of Stockton to treat pension fund obligations like other debts, allowing the city to cut benefits.
Stockton argued that it must make its pension contributions for public employees before its creditors are paid the entire amount they are owned.
U.S. Bankruptcy Judge Christopher Klein ruled Wednesday that federal law and the U.S. Constitution trumps special protections that attorneys had argued protects the inland California city's contract with the nation's largest state pension fund, the California Public Employees' Retirement System.
The ruling, which is likely to be appealed, could help clarify who gets paid first by financially strapped cities around the nation — retirement funds or creditors.
It was prompted by a key creditor's contention that pension obligations should be treated like other debts. Franklin Templeton Investments said the pension payments are fair game as it tries to collect on an unsecured $32.5 million claim against the city.
Klein said he would announce his decision Oct. 30 on the city's overall plan to leave bankruptcy and the contention by Franklin Templeton.
If the judge rules against the city's reorganization plan and forces the city to end its CalPERS contract, Stockton bankruptcy attorney Marc Levinson said employees of Stockton could be forced to take a 60 percent pension "haircut."
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