Oct. 1 (Bloomberg) -- The California Public Employees’ Retirement System doesn’t deserve special protection as a creditor in a municipal bankruptcy, according to the judge overseeing the debt restructuring of Stockton, a case that pits public pension advocates against Wall Street creditors.

The city’s debt-cutting plan would protect Calpers, the $296 billion pension fund, from any cuts while imposing steep reductions on money manager Franklin Resources Inc. Under the proposal, Calpers would be fully repaid while two Franklin funds would get back only about 1 percent of the $36 million they are owed.

U.S. Bankruptcy Judge Christopher Klein, who could rule soon on the city’s plan, cast doubt on Calpers’ treatment at a hearing today in Sacramento, California.

The state’s public employee retirement law “is simply invalid in face of the U.S. Constitution,” Klein said. Its contracts with cities can be canceled like other agreements that can only be modified in federal court under the U.S. Bankruptcy Code, he said.

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