Court Ruling in Stockton Illuminates the Road to Hell Via Deliberate Municipal Bankruptcies

I’ve been sounding this alarm for years.  Some of my good friends have assured me that this couldn’t happen — that pensions are safe from municipal bankruptcies.  Well, don’t look now — but a ruling has come down that you should see:

A federal bankruptcy judge on Wednesday upended the widely held belief that public workers’ pensions have a special status in California that makes them impossible to cut, further chipping away at the idea that pensions are sacrosanct in a municipal bankruptcy.

The ruling, which came during a hearing on a plan by the City of Stockton to exit bankruptcy, did not order the city to cut its pension plan or take any specific action. The judge said that he needed more time to reflect on Stockton’s situation and that he would decide Oct. 30 whether the city could emerge from its two-year bankruptcy or whether it still had more work to do.

But the decision, by Judge Christopher M. Klein of the Eastern District of California, dealt a blow to California’s giant state-led pension system, known as Calpers, which has been leading efforts to preserve defined-benefit pensions nationwide.

It echoed a decision made last year by Detroit’s bankruptcy judge, but went even further. While Detroit’s pension system was a struggling local entity with few friends in the state capital, Calpers is a powerful arm of the state, with statutory powers that include liens allowing it to foreclose on the assets of a city that fails to pay its pension bills.

Calpers had argued that if Stockton stopped making payments and dropped out of the state pension system, the lien would let it claim $1.6 billion of its assets. But Judge Klein said those statutory powers were suspended once a California city received federal bankruptcy protection.

“Why should I take that lien seriously?” he asked a lawyer for Calpers, Michael Gearin. “I may avoid it as a black-letter matter of bankruptcy law,” he said, referring to well-established legal principles.

He did not dispute that Stockton would be billed $1.6 billion to leave Calpers and said such a termination fee “can be seen as a golden handcuff.” But in bankruptcy, he said, Stockton could legally refuse to pay the bill because it arose from the city’s contract with Calpers, and contracts are broken routinely in bankruptcy.

“The bankruptcy code provides that the lien can be avoided and be treated as an unsecured claim,” Judge Klein said.

A local newspaper headline announces bankruptcy in Stockton, California

Has the future of Anaheim and other OC cities been foretold?

Some of you may not like unions — but remember that unions deferring benefits in pensions is one thing that has kept the current balance sheet for municipalities going strong.  And remember that civic leaders, acting on behalf of the public, have been entirely complicit in this — often being the ones to suggest it.  If you’re fine with the notion of their reneging on those agreements, they you really don’t give a damn about the middle class.  This is the difference between millions of people being in poverty, post-retirement, or not — while the wealthy among us divert an ever larger share of income into their coffers.

This, to me, was always the underlying issue when it came to Costa Mesa.  It was the issue that outweighed police misconduct (with which I know many of you will still contemptuously disagree) in Fullerton.  And it is the fundamental issue in this year’s election in Anaheim, and elsewhere:

Do we want city leaders who may deliberately spend a city into bankruptcy to avoid pension obligations?

I don’t.  That’s why I, as a liberal Democrat, make common cause with many good-hearted conservative Republicans in opposing profligate municipal spending.  “Creating jobs” is a load of hooey if it does so only by cannibalizing pensions.

This also points to a major division within the labor community that is rarely as stark as you see it in OC — but it’s a division where only one side seems to be fighting.

Building trades workers — the ones who have spent a good part of this year attacking me — don’t have to worry about municipal pensions.  They get paid for a project and they’re gone.  If a city goes bankrupt, they’ve already been paid.

Public employees depend on the continuing existence of a city (or other municipality) for their welfare in retirement.  This gives them (at least in the presence of good leadership) a continuing stake in the economic welfare of a community.  They can’t be looters if they are looting their own savings!

This may boggle people’s minds, but there is a natural alliance to be had between fiscal conservatives and public employees who both want to see cities continue as thriving going concerns.  They both have a And the opponents in alliance are those people who can suck capital out of the municipality and leave it to go bankrupt — at which point the “fatten and slaughter” process can begin again.

The looters get it.  Their allies in the building trades get it.  It’s time that the conservative stewards and the public employees — who, whether they realize it or not, depend on those stewards avoiding profligate spending projects — got it too.  If police and fire groups are on the same side as the looters, as is the case here, they are slitting their own throats.  And a bankruptcy judge just showed them how it will be done.

The final link in the chain around municipalities’ necks is the case that CATER is currently fighting — soon taking it to appeal — about municipal bonds, because the City of Anaheim wants a three-person majority of a City Council to be able to spend a city into oblivion at will.  More on that next week.


About Greg Diamond

Somewhat verbose attorney, semi-retired due to disability, residing in northwest Brea. Occasionally runs for office against bad people who would otherwise go unopposed. Got 45% of the vote against Bob Huff for State Senate in 2012; Josh Newman then won the seat in 2016. In 2014 became the first attorney to challenge OCDA Tony Rackauckas since 2002; Todd Spitzer then won that seat in 2018. Every time he's run against some rotten incumbent, the *next* person to challenge them wins! He's OK with that. Corrupt party hacks hate him. He's OK with that too. He does advise some local campaigns informally and (so far) without compensation. (If that last bit changes, he will declare the interest.)