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Why a judge's Stockton bankruptcy ruling matters

A judge hearing the city of Stockton, California's bankruptcy case ruled late Wednesday that a bankrupt city can cut public pensions.

The decision by U.S. Bankruptcy Judge Christopher Klein sets a legal precedent that there is no special protection for public pension funds—and it could be followed in other municipal bankruptcies.

"To have a judge—a federal judge—say what Judge Klein is saying today, which is that pensions can be impaired in Chapter 9 bankruptcy, certainly gives cities something to consider as they're evaluating their position with regard to their pension obligations," bankruptcy attorney Michael Sweet of Fox Rothschild in San Francisco said after the ruling.

"These judges are all looking at the same federal law and they're all interpreting it similarly," he said. "One would think that if a bankruptcy judge has given this interpretation, if nothing else it could be persuasive to the next (judge) who might be asked to make that same decision."

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One of the major Stockton creditors, Franklin Templeton Investments, has not settled with the city and maintained that CalPERS, the state's public pension fund and the nation's largest, has received special treatment and should be dealt with like other creditors in the case.

Stockton has said that it plans to continue making its full pension contributions to CalPERS, arguing that it must make those payments under state law.

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CalPERS issued a statement after the judge's ruling: "We disagree with the judge's opinion on the issue of pension impairment. This ruling is not legally binding on any of the parties in the Stockton case or as precedent in any other bankruptcy proceeding and is unnecessary to the decision on confirmation of the city of Stockton's plan of adjustment."

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Stockton, located 80 miles east of San Francisco, reached pretrial concessions from retirees and employees, along with settlements with all of the major creditors other than Franklin Templeton.

Stockton filed for Chapter 9 bankruptcy protection in 2012. The judge could rule later this month on whether the city can exit from bankruptcy.