Can public pensions be cut in bankruptcy?

Klein previously has said he does not want to confirm an inadequate debt-cutting plan that could lead to a second bankruptcy. He mentioned reports that Vallejo, which did not cut pensions in bankruptcy, still faces deficits despite a 1-cent sales tax increase.

During the first phase of the Stockton trial last month, the judge reportedly said while listing several possible actions: “Or I might conclude the CalPERS contract can be impaired, but in this case the decision (by the city) not to do so made sense.”

A federal judge ruled in the Detroit bankruptcy that pensions can be cut. In a brief backing an appeal, CalPERS argued the ruling nullifies section 903 of the bankruptcy code that “expressly preserves state laws governing its creatures” in bankruptcy.

Noting that it’s a state-run system, CalPERS asked the appeals court to limit its ruling on Detroit’s eligibility for bankruptcy to city-run retirement systems like the one in Detroit.

The CalPERS brief filed last month also argued that the ruling was “not absolutely necessary” to determine Detroit’s eligibility for bankruptcy, and therefore is an “improper advisory opinion.”

At the Stockton trial last week, an attorney for CalPERS, Michael Gearin, said any ruling on the impairment of pensions should be framed in specific terms. He said none of the parties in the trial have asked to impair or cut CalPERS obligations.

Gearin asked Judge Klein not to make an unnecessary ruling on the impairment of pensions and to wait until impairment becomes an issue. He said a ruling would trigger a costly legal battle.

Stockton has spent $13.9 million on the bankruptcy filed two years ago, a report filed last week said. The Orrick, Herrington and Sutcliffe law firm received $10.4 million that includes $500,000 to $1 million for consultants and vendors.

Franklin argued during the trial that Stockton’s plan, which builds a large reserve and understates revenue, will have enough money to pay both Franklin and the full CalPERS pension obligations.

“This isn’t a case of inability to pay; it’s unwillingness to pay,” said the Franklin attorney, James Johnston.

Franklin has pointed to the lack of consistency or fairness in the Stockton proposal to pay Franklin a penny on the dollar while paying the largest creditor, CalPERS, in full.