Stockton, on verge of bankruptcy, running up against the 800-pound gorilla known as CalPERS

When the city manager of troubled Stockton had to tell City Council members why it was on track to become the biggest U.S. city yet to go bankrupt, it took hours to get through the list.

There was the free health care for retirees, the unpaid parking tickets, the revenue bonds without enough revenue to pay them. On it went, a grim drumbeat of practically every fiscal malady imaginable, except an obvious one: municipal pensions.

Stockton is spending about $30 million a year to pay for them, but it has less than 70 cents set aside for every dollar of benefits its workers expect.

Some public pension experts think they know why pensions were not on the city manager's list. They see the hidden hand of California's giant state pension system, known as Cal-PERS, which administers hundreds of billions of dollars in retirement obligations for municipalities across the state.

CalPERS does not want cities like Stockton going back on their promises, and it argues that the state Constitution bars any reduction in pensions -- and not just for people who have already retired. State law also forbids cuts in the pensions that today's public workers expect to earn in the future, CalPERS says, even in cases of severe fiscal distress. Workers at companies have no comparable protection.

Stockton is in the midst of a mediation process with its creditors that will determine by the end of June whether it will file for Chapter 9 bankruptcy, which would allow the city to negotiate reductions in its debt in court.

For CalPERS, the prospect of a California city in U.S. Bankruptcy Court portends a potential test of the constitutional mandate that federal law trumps state laws -- in particular, the state laws that protect public workers' pensions in California.

Such a challenge could blow a hole in what experts consider the most airtight pension protections anywhere.

"Obviously, what CalPERS wants is that it doesn't come up in the process, which I think is ridiculous," said David A. Skeel Jr., a law professor at the University of Pennsylvania who writes frequently on bankruptcy. "My view is that even the California Constitution is subsidiary to federal bankruptcy law."

As the U.S. population ages and more and more public workers qualify for retirement, the cost of their pensions is growing fast, turning into a major drag on many local governments' finances. The pension contributions that cities must make every year are rising, but their revenue, which often depends on property taxes, is not keeping up.

Taxed-out residents, many of whom have lost their own pensions in the private sector, are unwilling to pay more. In tax-averse California in particular, where every tax increase must be put to a vote, officials are running out of options and some are considering bankruptcy.

Bankruptcy in America is a collective process, where creditors of a distressed company or municipality come together under court oversight and negotiate a plan to share the losses equitably, for the sake of the greater good. Some creditors may stand more toward the front of the line and others at the back, but there isn't generally one big creditor that gets paid in full without having to get in line at all.

Yet that's what CalPERS appears to be doing.

"They will probably say it's a statutory right and it can't be changed by a bankruptcy court," said James E. Spiotto, a Chapter 9 specialist with the firm of Chapman & Cutler. "I think it's still subject to some question."

A spokeswoman for Stockton's city manager, Connie Cochran, said she could not discuss the city's dealings with CalPERS, citing the confidential mediation process.

In California, the only precedent is in the city of Vallejo, which declared bankruptcy in 2008. It kept making all of its contributions to CalPERS throughout its three-year bankruptcy.

"We never shortchanged CalPERS," said Robert Stout, Vallejo's finance director at the time.

Stout said he had expected to renegotiate the city's retirement plans in bankruptcy, since everything else was on the table. At the time, Vallejo was in a fiscal tailspin with the mortgage debacle, which hit cities in California unusually hard.

But CalPERS drew a line in the sand, warning Stout and his lawyers that in California, public pensions can be increased but never decreased, not just for retirees, but also for workers at midcareer.

What if the city is bankrupt and cannot afford it? "They made it quite clear that they take that law very seriously," Stout said. CalPERS also warned that if the bankruptcy judge ruled that the state pension laws stopped at the federal courthouse door, CalPERS would appeal, and make Vallejo pay its legal bills.