If you thought politics would settle the raging debate over public pensions, think again. The real action has shifted to the courts.

City bankruptcies filed by Stockton and San Bernardino have awakened municipal bondholders and bond insurers, who are now bent on testing commonly held notions that public pension promises can't be broken.

"The law is far less clear than you'd think," said Douglas Baird, a pension law expert at the University of Chicago.

The political pressure surrounding public pensions the last few years has been so intense that even union-friendly Democrats jumped into the fray. Gov. Jerry Brown issued a plan to make changes, saying "the arithmetic doesn't add up." Democratic leaders in the Legislature committed to sending Brown a pension reform bill by the end of this month. (We'll see.)

But now, with Stockton and San Bernardino filing for bankruptcy, Wall Street is engaged.

Take Stockton. Stockton pays $29 million a year to the California Public Employees' Retirement System to cover its annual pension obligations, and it borrowed $125 million from the bond market five years ago to pay for a pension benefits hike. City leaders haven't put CalPERS on its bankruptcy list of creditors, who ultimately aren't likely to be paid in full. Bond insurers say the city should cut Cal-PERS payments along with those to other creditors.

CalPERS, the nation's largest public pension fund, plans to file its rebuttal soon. Let's say CalPERS loses the argument, and Stockton stiffs the fund just like its other creditors.

"Ultimately, if the employer can't pay us, the employees suffer," said CalPERS spokesman Brad Pacheco on Wednesday, because the fund simply facilitates whatever pension agreement is worked out between a city and its workers. "We're positioning ourselves (in court) to protect our members."

In other words, they think pensions for current city employees and pensioners are at risk.

More cities could line up if the Stockton case sets that precedent. Moody's, one of the nation's top credit rating agencies, figures about 10 percent of California cities have declared fiscal crises. Many could wind up in bankruptcy. Warren Buffett recently got out of the municipal bond insurance business. It's telling that one of the world's most savvy investors thinks municipal bonds are a bad bet.

Bankruptcy law v. pension fund law is shaping up to be a ruthless fight. Wall Street lawyers don't care about voter opinion polls, whether retirement funds are burning through money that could go to schools or if CalPERS' assets are $30 billion shy of its obligations – or $300 billion.

They're about limiting cli- ents' losses and maximizing clients' gains. And they've been unleashed by a bond market that always viewed its investment much like civil servants view a pension – a reliable government contract.

You can smell the lawsuits cookin'.

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