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Will Stockton's bankruptcy kill the public pension as we know it?

Court to Decide on Pensions in Stockton, Calif., Bankruptcy - NYTimes.com


But there is a looming, larger question that has pension funds around the country nervous: Will a victory by bondholders in Stockton pave the way for cuts in its workers’ pensions and its payments to Calpers, which, in turn, could lead to the demise of other public pension plans?

One small city in Rhode Island, Central Falls, has already cut its pensions severely, but legal experts say Rhode Island’s laws made it easier there than it would be in most other places — particularly California, where the huge state pension system has deep pockets to fight legal battles. Central Falls was not part of any state system, and its pension fund for police officers and firefighters nearly ran out of money.

“People will be watching very closely,” said Michael A. Sweet, a bankruptcy lawyer at Fox Rothschild in San Francisco, whose practice includes advising local governments on Chapter 9 issues.

Cities, school districts and local governments all over the country have promised their workers pensions that looked reasonable in better times, but have turned into budget-busters since the financial crisis. Local taxpayers are increasingly unwilling to shoulder the rising costs, yet conventional wisdom has it that public pensions cannot be reduced. Some officials are quietly wondering if that means not even in bankruptcy.

“Every member of every city council that’s struggling with these issues, who takes their job seriously, is looking for solutions,” Mr. Sweet said. “No one wants to talk about it, and no one really wants to go there. But if Calpers can be forced to take a haircut in Stockton, then what’s to stop another city from saying, ‘Gee, we’ll file for bankruptcy and cut in half our $10 million pension contribution?’ ”