Can public pensions be cut in bankruptcy?

Bus stop in Stockton, Delta College. (Photo: San Joaquin RTD)

Stockton filed a revised debt-cutting plan last week that could lead to a deal with a holdout creditor, Franklin bonds, possibly enabling the city to emerge from bankruptcy without cutting pensions.

But however that plays out, a federal judge may make a clarifying ruling on the general issue of whether public pensions issued through the California Public Employees Retirement System can be cut in bankruptcy like other debts.

Two Franklin bond funds, which would get a $350,000 payment for a $35 million bond issue, claim unfair treatment because other creditors get most of what they are owed and the largest creditor, CalPERS, is untouched.

After Judge Klein’s ruling that retiree health care can be cut in bankruptcy, a debt valued at $544 million by the city was cut to a one-time payment of $5.1 million.

Stockton was able to negotiate agreements with all city unions, retirees and other major creditors, including two insurers of the city’s largest bond issues, who opposed the city’s eligibility for bankruptcy.

In a trial triggered by the opposition of Franklin, U.S. Bankruptcy Judge Christopher Klein last week heard closing arguments about whether the Stockton debt-cutting plan to exit bankruptcy should be confirmed by the court.

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