Why doesn’t Stockton challenge CalPERS in bankruptcy?
The public pension fund crisis is dire across most of America. Some states and local governments have well funded pension plans, but on a national basis pension plan shortfalls are estimated to be in the trillions of dollars. Public resources are increasingly being diverted to pay for pensions. Cities with large public pension plans had median contribution rates of 12.7 percent of payroll in 2009, up from 10.3 percent in 2002 (GAO page 15). This is projected to climb as more public workers retire. As pension costs rise, state and local governments either have fewer resources to spend or must raise taxes to maintain a steady level of services.
California has bestowed some of the most generous pensions in the country, and cities there are looking for ways to lower their contributions. Recent ballot initiatives passed in San Diego and San Jose will create modest reforms to those cities’ pension benefits. The San Francisco Chronicle reported that State Senate President Pro Tempore Darrell Steinberg (D-Sacramento) suggested there might be some “constitutional issues” at play since the San Diego and San Jose reforms affected the benefits of current public workers. The reforms are being challenged in court.
But there is one place, clearly within the law, that cities can make substantial and fiscally stabilizing changes to their workers’ pension benefits: Within the Chapter 9 municipal bankruptcy process. Cities like Stockton, Mammoth Lakes and San Bernardino have the opportunity to adjust their pension liability as they seek to adjust their other unsecured creditors.
The federal judge in the Vallejo bankruptcy made a very explicit ruling that a city in Chapter 9 is given authority under federal law to reject contracts. Pension benefits are a “contract” under California law. The Vallejo judge, Michael S. McManus, Jr., specifically said in his ruling (page 73, clause 3102.1):
Debtors’ authority to reject executory contracts, as set forth in the Bankruptcy Code, preempts state law by virtue of the supremacy clause, the bankruptcy clause, and the contracts clause. U.S.C.A. Const. Art. 1, § 8, cl. 4; U.S.C.A. Const. Art. 4, § 1 et seq.; U.S.C.A. Const. Art. 6, cl. 2.
Translation: Public pensions benefits are construed as a “contract” under California state law, but bankruptcy law is federal and preempts state contract law. A city in Chapter 9 bankruptcy has the ability to lower pension benefits by rejecting their pension contract.
So why didn’t Vallejo adjust pension benefits in bankruptcy if the judge said that it could? From a blog post I cited yesterday, it appears that CalPERS lawyers threatened Vallejo with endless litigation:
“In bankruptcy, the City [Vallejo] considered a number of options regarding reductions in existing employee compensation, current retiree health care and current retiree pension benefits. According to our lawyers, CalPERS’ outside bankruptcy lawyers told them that they would challenge any attempt by the City to reduce current retiree pensions.
“So while the City considered pursuing reductions of current pensions of existing retirees, we had to make our decision in light of the legal issues (primarily California constitutional and statutory protections), equity/fairness issues, and cost issues (CalPERS would likely have devoted significant resources to challenge the ability of the City to modify current retiree pension benefits) …”
And there seems to be a pattern of threatened litigation from CalPERS. Stockton’s local newspaper, the Record, held an online chat with reporter Scott Smith, who is covering city hall and the bankruptcy process, and I asked him about this:
Comment From Cate Long
Any idea why the AB 506 discussions and the “Ask” did not include any reductions from CalPERS? Based on a ruling in the Vallejo bankruptcy the city would clearly have the right to lower pension contributions. Thanks and great reporting.
Scott Smith: Hi Cate. I believe that Stockton officials have a couple of responses to their decision not to ask anything of CalPERS.
Scott Smith: I think they fear that CalPERS might bury them in litigation. But even greater, they worry that it would impact the current employees and cause a mass exodus of city employees.
That “bury them in litigation” response sounds identical to what happened in Vallejo. It’s true that CalPERS, using funds contributed by Stockton and other cities, has more resources than Stockton. But Stockton will owe $245 million to CalPERS over the next 10 years to pay annual pensions that in many cases are multiples of what city residents earn while working. How is this equitable? Also one of Stockton’s bond insurers is challenging the whole bankruptcy process, since the city did not ask CalPERS for any reduction in its liability.
In a bankruptcy everyone must give up something. Exempting pension benefits may buy short-term peace from labor unions but will starve the city long term of the resources it needs to pay current police and firemen. CalPERS needs to be challenged in court. It’s the only path to fiscally stable California communities.