Stockton, Calif., declared Chapter 9 bankruptcy last year after suffering one of the country’s sharpest riches-to-rags swings when the mortgage bubble burst. Struggling to stay afloat, Stockton has slashed tens of millions of dollars’ worth of city services — firefighters, senior centers, library programs for at-risk children — and said it would cut its municipal bond repayments to a degree never seen before in a municipal bankruptcy.
 
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 Monday.
 
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?
 
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. . . . 
 
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,” (bankruptcy lawyer) 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?’ ”. . . 
 
Calpers is a $252 billion giant that administers pensions for California state employees and many municipal workers. It calculates how much its member cities must set aside each year, bills them, collects the money, invests it and sends retirees their benefits. When Calpers’s investments lose money, as they did in the stock market crash, the bills increase.
 
In 2011, Stockton paid a little more than $20 million to Calpers — about double what it paid to run its public libraries. Its payments are expected to nearly double in the next 10 years, making Calpers the city’s biggest creditor. Stockton says it has no choice but to keep paying, even as it pares other costs, including its payments to bondholders. . . .
 
“They’re scared to death,” Mr. Sweet said. “Calpers says, ‘You can’t give us a haircut, because if you do, the world is going to collapse. If it happens in Stockton, it’s going to happen in San Bernardino, and if it happens in San Bernardino it’s going to happen in Modesto, and if it happens in Modesto it’s going to happen in Bakersfield, and if it happens in Bakersfield it’s going to happen in Fresno.’ ”
 
In fact, San Bernardino filed for Chapter 9 bankruptcy not long after Stockton did, then simply stopped making its contributions to Calpers. Calpers geared up to sue, but the judge handling San Bernardino’s case, Meredith M. Jury, stopped it, saying she would address the issue of pension contributions later in the bankruptcy.
 
A spokeswoman for Calpers, Amy Norris, praised Stockton for keeping up its pension contributions in bankruptcy, saying it had made “the right business decision.”
 
But the Wall Street creditors say Stockton is getting the money for Calpers by shortchanging its bondholders."
 
Summing Up

We can't spend the same dollar twice, and taxpayers feel like they're spending enough dollars already.

Pensioners want paid, and so do bondholders. Meanwhile, citizens want their various public services continued uninterrupted. But to repeat, the same dollar can't be spent twice.

And this realization that limited funds are available to pay unlimited claims is now happening everywhere throughout the world, and seemingly all at once.

Cyprus is broke. Stockton is broke. Detroit is Broke. Chicago and Illinois are broke. Spain and Italy are broke. And so on.

The U.S. is 'sequestered' and our entitlements are underfunded by at least $100 trillion while our acknowledged national debt approaches $17 trillion. The politicians are acting like a deer in the headlights. They don't know what to do, and even if they do, they're afraid to do it for fear of backlash.

Many U.S. public sector city and state pension funds are also broke and taxpayers, employees and retirees will be sharing the pain with bondholders and other creditors for years to come. Exactly how that pain will be shared by all has yet to be determined, of course.

And so it goes with underwater home mortgages and future foreclosures, teachers pay, retirement funding, future hiring and so forth. And lest we forget, student loans as well.

Throughout the world, we've tried to live beyond our means, and now the bills are coming due. The fact is that we're not as rich as we thought we were.

City, state, federal and even international government entities will wrestle with these issues for years to come. And that means so must we as individuals.

Living within our means will of necessity become the future norm.

But in the interim, the road ahead will entail lots of financial pain which will be spread and shared far and wide.

And that inevitable pain will be spread and shared unevenly and unequally, respectively.

However, in some meaningful and lasting way it will be experienced by all of us.

That's a necessity.

Thanks. Bob.