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California public pensions not sacrosanct in municipal bankruptcies

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This has enormous implications. A federal judge has ruled California public pensions, like those managed by giant Calpers, are not protected when a municipality files bankruptcy. Thus, public pensions can be cut or eliminated during bankruptcy. The ruling came as part of the Stockton CA bankruptcy.

The issue was raised by Franklin Templeton, who owns Stockton debt. They were offered less than a penny a dollar on the unsecured portion. Franklin said it was unfair they would get so little while Calpers would not lose any money, since similar creditors must be treated equally. The judge says it wasn’t even clear if Calpers was a creditor. That’s a big ouch for Calpers, who until now has enjoyed near-dictatorial powers in California.

He did not dispute that Stockton would be billed $1.6 billion to leave Calpers and said such a termination fee “can be seen as a golden handcuff.” But in bankruptcy, he said, Stockton could legally refuse to pay the bill because it arose from the city’s contract with Calpers, and contracts are broken routinely in bankruptcy.

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