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Can Public Pension Plans Be Modified?

Yes. Cracks are starting to appear in the armor that traditionally protected public pensions.

As reported by the ABI – First in Detroit, then in Stockton, CA, and now in New Jersey, judges and other top officials are challenging the widespread belief that public pensions are untouchable, the New York Times reported yesterday.

New Jersey Governor Chris Christie delivered the latest blow on Tuesday, when he proposed to freeze that state’s public pension plans and move workers into new ones intended not to overwhelm future budgets or impose open-ended demands on taxpayers.

The first crack came in Detroit, where a judge ruled that public pensions could, in fact, be reduced, at least in bankruptcy. Then, just a few weeks ago, an opinion by the bankruptcy judge for Stockton, which emerged from chapter 9 yesterday, called CalPERS a bully for insisting in court that pension cuts were wholly out of the question. Such dogma “encourages dysfunctional strategies,” wrote Bankruptcy Judge Christopher Klein for the Eastern District of California. He said that CalPERS’s legal arguments were invalid, concluding that it lacked standing to dominate the courtroom discussion the way it had.

More striking is the fact that Stockton did not even seek permission to freeze its pension plans, but Judge Kleinthe nevertheless wrote that it was entitled to do so and went on to cite steps that struggling cities in general should take to trim their pension costs legally.

New Jersey seems have taken Judge Klein’s instructions to heart, even though states cannot file for bankruptcy and thus lack that particular leverage. For months, a pension commission formed by Governor Christie has been working quietly with the New Jersey Education Association, normally one of the state’s most litigious pension adversaries. By talking to each other instead of battling in court again, the two groups managed to find enough common ground to issue what they called a “road map” toward solving New Jersey’s daunting pension problems.