As public pension funds face underfunding problems across the country, all eyes in the pension fund community kept one eye on results from Stockton, California’s plan to shortchange bond investors while shielding public pensions.

Stockton to pay bond investors pennies on the dollar

The court ruling allows the bankrupt city in the shadows of Los Angeles to pay bond investors pennies on the dollar while keeping intact pension plans for its public employees. “This plan, I’m persuaded, is the best that could be done in terms of restructuring the city’s debts,” U.S. Bankruptcy Judge Christopher Klein was quoted by Bloomberg as saying at a hearing today in the state capital.

Don't Touch Government Pensions Judge Says In Stockton Ruling

Klein’s ruling was a reversal of his previous decision that Calpers should not receive special protection and that sometimes generous pension plans for government workers could, in fact, be reduced to pay bond holders. The previous decision would allow Stockton to end its contract with Calipers, but the judge was reported to say the workers “would be the real victims,” as benefits could then be cut.

A bankruptcy judge in Detroit had previously ruled has against pension funds in a similar situation, the report noted. The Midwestern city will learn next week if it can proceed with a $7 billion debt reduction plan that would levy extract cuts from retirees and some bondholders were reached through mediation. Detroit declared bankruptcy last year listing some $18 billion in liabilities.  Other governments, such as Chicago and the state of Illinois, are said to have similar troubles, and thus a legal precedent could go a long way to shape decisions across a number of municipalities.

Stockton’s smart decision to protect pensions

“The city has made a smart decision to protect pensions and find a reasonable path forward to a more fiscally sustainable future,” Calpers Chief Executive Officer Anne Stausboll was quoted as saying in a statement. “We will continue to champion the integrity and soundness of public pensions.”

The issue of government organizations providing employees generous pensions typically not available in the business world, and then not being able to adjust the rich contracts, ties a government’s hands in terms of dealing with the problem, said Dan Pellissier, president of Sacramento-based California Pension Reform.

Pension obligations have driven many government agencies toward financial insolvency, and Stockton is betting that they can manage their financial future without fixing its unsustainable pension obligations,” Pellissier told Bloomberg in a phone interview. “The purpose of bankruptcy is to get a fresh start on your finances.”