Pension Precedent

Public union privileges

Several California cities have declared bankruptcy in recent years, triggering a painful process in which creditors squabble over fiscal scraps. This October the city of Stockton, which filed in 2012, saw a landmark showdown between a public pension fund and a private creditor.

The California Public Employees' Retirement System (CALPERS) insists the city isn't legally permitted to restructure its pension obligations, pointing to state regulations that forbid any meddling that reduces a public employee's benefits. But Stockton's bankruptcy is a federal matter, and a federal judge made it clear in October that pension debts are not immune to reduction during a reorganization.

Franklin Templeton Investments, which is owed $36 million, was unsatisfied with the $4 million it was allotted in Stockton's original plan. The mutual funds firm appealed to U.S. Bankruptcy Court Judge Christopher Klein, asking for a bigger bite from CALPERS' generous slice of the dwindling pie.

Klein ruled that pensions could be cut-an important precedent in coming California city bankruptcies-but Franklin Templeton still walked away disappointed. Later that month, Klein ruled to accept the city's bankruptcy plan, which leaves its pension debts intact.