When government employees buy the California legislature with huge campaign contributions, one of the benefits they expect in return is absolute protection of the lush pensions they are promised, even when their employer goes into bankruptcy. Thus, California law insists that Calpers, the state-backed agency used to provide many government employees with their pensions, is granted very special powers, including the right to seize assets and liquidate them to provide for full payment of pensions, even when other creditors are paid a penny on the dollar.

But yesterday, a federal bankruptcy judge in California issued a preliminary ruling indicating that once federal bankruptcy protection is sought, federal law trumps the state laws. Mary Williams Walsh reports in the New York Times:

A federal bankruptcy judge on Wednesday upended the widely held belief that public workers’ pensions have a special status in California that makes them impossible to cut, further chipping away at the idea that pensions are sacrosanct in a municipal bankruptcy.

The ruling, which came during a hearing on a plan by the City of Stockton to exit bankruptcy, did not order the city to cut its pension plan or take any specific action. The judge said that he needed more time to reflect on Stockton’s situation and that he would decide Oct. 30 whether the city could emerge from its two-year bankruptcy or whether it still had more work to do.

But the decision, by Judge Christopher M. Klein of the Eastern District of California, dealt a blow to California’s giant state-led pension system, known as Calpers, which has been leading efforts to preserve defined-benefit pensions nationwide.

California law discriminates in favor of government employee pensions, but federal bankruptcy law does not:

Calpers had argued that if Stockton stopped making payments and dropped out of the state pension system, the lien would let it claim $1.6 billion of its assets. But Judge Klein said those statutory powers were suspended once a California city received federal bankruptcy protection.

“Why should I take that lien seriously?” he asked a lawyer for Calpers, Michael Gearin. “I may avoid it as a black-letter matter of bankruptcy law,” he said, referring to well-established legal principles.

He did not dispute that Stockton would be billed $1.6 billion to leave Calpers and said such a termination fee “can be seen as a golden handcuff.” But in bankruptcy, he said, Stockton could legally refuse to pay the bill because it arose from the city’s contract with Calpers, and contracts are broken routinely in bankruptcy.

“The bankruptcy code provides that the lien can be avoided and be treated as an unsecured claim,” Judge Klein said.

For the moment, there is no legal effect from the judge’s ruling, but if his final ruling on October 30 treats pensions like any other claim, you can expect convulsions from government employee unions nationwide.  They regard themselves as an aristocracy immunized from the forces that affect everyone not on the govenrnment payroll. Expect a push to change federal bankruptcy law the next time Democrats control Congress and the Oval Office.