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.
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.
Hey – that makes two of us beating this drum
I have friends who work for the County of Orange. They have no savings, but think their pension is safe because “it’s the law.”
They think I’m a lunatic for questioning that. I suspect their co-workers think the same.
Promising pensions and then reneging has a long, sad history in America. It happened to my grandfather….
This lawsuit affected CalPERs being able to collect on the pension obligations owed them now and in the future by the city of Stockton. What’s interesting is Stockton wasn’t suing them,a Wall Street hedge fund was, because they didn’t think it was fair that CalPERs could still get paid but they only got .30 cents on the dollar. Now Stockton is making sure that CalPERs doesn’t leave. They want to stay in CalPERs. If they leave then they will somehow have to fund the entire retirement of thier employees or that contract will be broken. So who does the 65 year old retired cop sue? CalPERs or the City? Stockton went broke over a bad redevelopment deal. They didn’t get broke for police and fire although they were irresponsible in raising compensation to dangerously high levels. When the global recession hit, their real estate gamble blew up. The redevelopment money train derailed. And they were left with trying to figure out how to pay for the only thing a city actually should be providing. Public safety and services. If Stockton reneges on all their retired employees, imagine them trying to retain or hire anybody to work in the city. They might as well shut down. But that would be Costa Mesa candidate Jim Righeimers dream.
Stockton went broke because of a bad redevelopment deal?? You’re out of your mind if you think that’s what got Stockton in this mess. Employee contracts negotiated by union bosses and politicians whose campaigns they funded. Start there and go down that rabbit hole.
Oracle – disagree. Stockton went bankrupt because the city went into major bonded debt to build monuments like a marina, new convention center, and other goodies that the city and bondholders were betting would be paid for by revenues these facilities would generate and the boom in development occurring in the city. Then the economy tanked, the revenues did not materialize, and the city was left with debt payments on these bonds without the revenue stream to pay for it. In listing its debts in the bankruptcy process, the city included the CalPERS obligations, as it did every debt. But, it was not the CalPERS obligations that drove the city under, it was betting-on-the come politicians and investors (bond marketers and buyers) who rolled the dice and lost. The scary thing is that the City Fathers of Anaheim want to do the same gamble on the convention center expansion, betting on the come. Build it and they will come? Not always.
It is popular lore to blame pensions for being the cause of financial crisis in Vallejo, Stockton and Detroit. The truth is that pensions were not the primary cause – depending on the city it was corruption (Detroit), gambling with debt to bet on future income (Vallejo and Stockton) that was the primary cause. This is not to say that the cost of public sector pensions does not need to be reined in – it does – just that blame needs to be assigned to the dumb and sometimes corrupt decisions electeds made in these cities – in the case of Detroit the former Mayor who cozied up with Wall Street firms to float irresponsible bond deals is in prison for his corruption – good riddance. Sad thing is it is the citizens of Detroit and the city employees who are left to try and clean up that mess.
*Stay away from the floaters……we always say. Over has it exactly right.
You are right about Redevelopment in California. Those expensive boondoggles amounted to a different sort of drain – in terms of other agencies ripped off and huge debt burden lade on to property owners in project areas.
What has dropped a massive obligation millstone on municipalities’ General Funds are indeed pension obligations. That’s not “lore” in any sense. That’s accounting and it has affected places that most people would say are generally honestly run. The unions have made a habit of blowing off the amount of unfunded liabilities by the cheap trick of claiming the numbers are unknowable because of market fluctuations and therefore could be almost anything. This is disingenuous and reckless.
It’s like saying that truck may hurt me if i get run over but since the damage could be almost anything there’s nothing to worry about.
I can’t see any reason a promise to one party (bond underwriters) is less of a promise than that made to a politically well connected union.
And finally I would point out the massively incompetent, unfair, and disastrous retroactive pension giveaways first to the cops, and then to all public employees, in which years of service at one rate vanished immediately to be replaced with significantly more lucrative rates for years long since served – as per union agreement. As far as I am concerned this erodes any moral high ground the public employees might claim. A deal was only a deal from the taxpayers’ perspective.
Those craven politicians who went along with retroactivity and ridiculously early retirement ages belong behind bars.
If the proprietors of the amusement part lock every passage through it except the one that goes through the hall of mirrors, you can’t blame people for taking that path.
Let’s presume that raising compensation in current budgets was the smarter approach. Was it likely to happen? No. Were unions then supposed to give up trying to boost the compensation of their members — or to take the remaining option available to them? It’s very easy for you to say that they should have given up, but that’s silly.
Tend to agree with you on many points you make, David – expecially the part about retroactivity – but, those you believe should be behind bars keep gettting re-elected, fi not to the same position to another when they are termed out. So, the consensus does not seem to be with you at the ballot box..
*Speaking about voting…….Are you folks going to APPROVE all the Judges or just leave the boxes blank? How many Judges that are running unopposed are we supposed to approve? 13! Then we have choices on a few more. What about that Dr. D.? Approve, Disapprove or leave blank?