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Stockton, Calif., amends bankruptcy plan, but pension issue hovers


(Reuters) — The bankrupt city of Stockton, California, has submitted a revised plan to exit Chapter 9 that reflects the judge's ruling over the value of a holdout creditor's collateral, but a larger question still looms over whether public pensions will be cut.

The Northern California city, which entered bankruptcy in 2012 and hopes to exit Chapter 9 protection later this year, promised on Friday it would pay a secured claim of $4 million, according to court documents. The city initially had valued the collateral as worthless.

The value of the collateral, which includes two golf courses, a community center and a park, was a remaining point of contention in Stockton's case. In July, U.S. Bankruptcy Court Judge Christopher Klein ruled that the collateral with which Stockton could pay holdout creditor Franklin Templeton was worth $4.052 million. In early proceedings, Franklin had argued the value was between $6.12 million to $17.34 million.

But the question of the city's long-term structural health is still weighing on Judge Klein, who asked in July for the case's parties to explain why the city could not make cuts to its public pensions, the city's largest creditor, as it has to bondholders.

On Monday, the California Public Employees' Retirement System, or Calpers, filed a brief stating that the court should leave the pensions of city workers and retirees untouched, as the city had proposed in its bankruptcy “exit plan,” or plan of adjustment.

There is “no controversy on these issues,” Calpers wrote, because the city and Calpers were in agreement, and “the Court does not need to address impairment of the City's pension obligations.”

From Detroit, which last year filed the biggest ever U.S. municipal bankruptcy, to San Bernardino, California, the question of whether public employee pensions can be cut during municipal bankruptcy has been closely followed by pension funds, public officials, local governments and investors in the $3.7 trillion U.S. municipal bond market.

In the Stockton case, the judge has kept the question in the foreground, stating in July that his understanding of California law suggests that Calpers itself could not be challenged in bankruptcy but employees' pensions could be.

In court documents submitted Monday, Calpers said that “the hypothetical question” of whether pensions could be reduced “is of little significance because it is highly unlikely that a Chapter 9 debtor in California will ever wish to travel that path.”