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The California city of Vallejo is starting to receive national news coverage for its decision not to touch its pension debts in its plan to emerge from bankruptcy.

Barron’s, a weekly finance magazine, wrote an in-depth cover story today on the pressures facing public pension systems. Vallejo received a few mentions. The piece ended by detailing all of the cutbacks Vallejo has made because of bankruptcy: employee health-care benefits, police officers and payments to bondholders:

The only thing that will be left untouched? The very thing that tipped the California city into Chapter 9 — its $84 billion in future pension obligations.

The point is important for San Diego, as we noted extensively in a story last month. Those against San Diego considering municipal bankruptcy argue that pension benefits couldn’t be decreased in a filing and Vallejo’s case serves as an example.

Our determination:

It appears legally possible for a city to reduce pension benefits through bankruptcy. No one has tried it before, but someone will. That bankruptcy will be a costly war with an uncertain outcome.

Barron’s also quotes, Jim Spiotto, a Chicago-based municipal bond restructuring expert, who is surprised cites haven’t tried to reform their outstanding pension debts instead of upsetting bondholders and declaring bankruptcy:

“I just can’t believe that any bond issuer would be willing to suffer the stigma of defaulting on their general-obligation debt as a result of having to fund future pension obligations, but such a situation is no longer beyond the realm of possibility,” [Spiotto] observes.

There’s been an explosion of national news interest in public pensions since a well-respected think tank issued a report last month showing that eight states’ pension systems were underfunded by more than a third. This Barron’s story is one of the most detailed I’ve seen to date.

— LIAM DILLON

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