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Can public pensions be cut in bankruptcy?

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

The judge took a step toward settling the holdout by scheduling July 8 for his decision on the value of the Franklin bond collateral, two golf courses and a park. Stockton put Franklin in the same creditor class of unsecured debt as retiree health care.

The small payment to Franklin was said to be similar to the deep cut in retiree health care. 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 argued that the two money-losing golf courses and the park have little value due to use restrictions and other factors. But an expert testifying for Franklin said the golf course property was worth nearly $15 million.

revised plan Stockton filed last week put Franklin in a class by itself. After the judge sets a value for the golf courses and park, said the new plan, the city will choose one of three options: full payment, full payment over time or transfer of the property.

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.

Klein said he may produce something before the scheduled July 8 ruling on the value of the Franklin bond collateral.

“I might write a couple of decisions because we have a couple of very distinct facets to the case,” he said.

The judge made a reference to the CalPERS contention that it’s “an arm of the state” protected by federal law in bankruptcies, and he said if a debt-cutting exit plan is “confirmed and not performed” there is a question about what can be done.

“I think the law is very confused in the area,” he said.

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