After filing for bankruptcy last year, Stockton, Calif., has slashed tens of millions of dollars’ worth of city services and said that it would cut its municipal bond repayments to a degree never seen before in a municipal bankruptcy, the New York Times reported today. But it has drawn the line at slowing down its current workers’ pension accrual, or cutting the benefits its retirees now receive. Mutual funds that hold the threatened bonds, and the insurers that guarantee them, have cried foul, citing the principle that in bankruptcy, similar classes of creditors must be treated the same way. Their objections have prompted the federal bankruptcy judge handling Stockton’s case, Christopher M. Klein, to schedule a four-day trial this week, starting today. The immediate question before the judge is whether Stockton qualifies for chapter 9 at all; unlike companies, cities must meet certain criteria before they can get federal court protection from creditors. 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? Central Falls, R.I., 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.
