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.
This article originally appeared in print under the headline "Pension Precedent."
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