Lawyers representing all sides in the ongoing dispute between the now-bankrupt city of Stockton, Calif., its bondholders and the massive California Public Employees Retirement System say that the battle may make its way to the Supreme Court.
And with no existing legal roadmap for this kind of thing, experts say the fight will help explain who will eventually be responsible for what as more and more financially impaired governments work to shed their expensive employee retirement obligations.
According to the Financial Times and Debtwire, the battle has come down to whether or not the City of Stockton - the first of several large California cities to file for bankruptcy this year, based in part on its inability to pay for its pre-existing public employee benefits systems - can avoid impairing the CalPERS system as it seeks to sweep debts off its books.
CalPERS is being challenged in court by the bond companies which issued Stockton's debt and are now being asked by the city to take a huge loss on that $285 million in debt - yet not get CalPERS financially involved.
Lawyers for two of those companies, National Public Finance Guarantee and Assured Guarantee, both filed objections to Stockton's bankruptcy filing, arguing that the city had not negotiated in good faith with the creditors.
CalPERS has responded by saying that bankruptcy protection cannot limit the governmental or political powers of a municipality - protecting the pension fund and its assets.
Other lawyers say that cities cannot essentially "pick and choose" the parts of the bankruptcy code that suits them, to escape their financial obligations.
"Not much trumps federal bankruptcy law when federal bankruptcy law applies," attorney William Rhodes told the Times. "I hope we get clarity from a court ruling on the fact that goes to the merits of the case. If it gets appealed, even better. It won't stop at the trial level."
The legal gray area of the case is putting extra attention on the outcome, as it could affect city and state governments across the nation, many of whom are also hoping to curtail or nullify their outstanding pension obligations.
"CalPERS sees this as the first breach in the wall if it were to be decided against them, even on a negotiated basis," attorney Mark Berman told the Times. "If a municipality is going to be forced to go into Chapter 9, everything else should be on the table - all obligations."