Stockton wants to end generous healthcare benefits for its retirees

July 17, 2012

Some residents of Stockton, California are upset over the city’s decision to eliminate free healthcare benefits for public retirees. Michael Fitzgerald, a columnist for the Record, Stockton’s newspaper, wrote last week about the policy change:

The lavish perk that did the most to bankrupt Stockton is free lifetime medical care for some retired city employees and spouses. Now retirees are suing to keep it free.

And a commenter said in response:

You just wrote that retirees are the most responsible for the bankruptcy. The most? Really? Not an arena or a marina that has no fuel for boats or all the money the state raided to continue its programs, or……? About all that is left is retirees. And “unfunded liability.” Who even knew that arcane term before the City Manager started throwing it around, along with his other favorite, the Ponzi Scheme?

Of the 300,000 residents of Stockton, about 1,100 municipal retirees receive this generous benefit. The city, with very short notice, informed the retirees that those with less than 10 years of service would have to pay for healthcare benefits themselves immediately, while those with more than 10 years of employment would receive a stipend for a year then be required to cover themselves. The retirees have filed suit to stop the city from changing their coverage.

The city began in 1980 to give free healthcare benefits to police retirees and their spouses (or dependents) until age 62, or for a maximum of seven years. This benefit expanded over the years to cover all municipal employees and their spouses (or dependents), regardless of their length of employment. Between 1985 and 1998, the benefit was extended again to grant lifetime coverage for all classes of city employees. I haven’t been able to confirm how much this benefit costs the city, but after looking at the number of retirees there and the monthly premium, I estimate that it costs Stockton about $11.2 million per year. If correct, that would be an enormous drain on the city’s budget.

Retirees and their supporters have every reason to be outraged over this move. But ultimately a court must decide how retiree benefits which are part of  “OPEBs” (or other post-employment benefits) should be treated. The “other” refers to the fact that they are not pensions but benefits accrued through employment. Municipal pension benefits and OPEBs enjoy few rights in bankruptcy. James Spiotto, an expert on municipal bankruptcy at the law firm of Chapman and Cutler wrote this about OPEB liabilities in 2006:

In a Chapter 9, labor contract can be modified or rejected based upon business judgment that, balancing the hardship of rejection or reduction in benefits is outweighed by likelihood of “liquidation”. For municipality, liquidation is unlikely even though continued municipal operation may be threatened.

Spiotto is saying that labor contracts can be modified or thrown out if the municipality has real fiscal problems. This was the decision of the bankruptcy judge in the Vallejo case. Spiotto further details how a municipality in bankruptcy has no responsibility to “supply sufficient information sharing with employees or unions in order to reject or modify pension or OPEB,” meaning that essentially no negotiations are required to make changes to the labor contracts. Unfortunately for public workers and retirees, Spiotto delivers the coup de grace:

Accordingly, in Chapter 9, pension benefits and OPEBs receive no special treatment (unlike corporations in Chapter 11) and will be treated and adjusted just like other unsecured obligations.

The retirees have every right to sue and should be able plead their case in the public domain. But in the end it comes down to municipal bankruptcy law, and it appears that it’s not on the retirees’ side.

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