One More Stockton Bankruptcy Update ... Pensions at Risk But Clarity Lies Ahead for All Concerned

Public employee pension benefits are definitely at risk in the Stockton bankruptcy proceedings.

City bankruptcies loom over retiree plans describes the broader story as follows:

"A federal bankruptcy judge’s decision in California yesterday cleared the way for Stockton, Calif., to reorganize its finances through Chapter 9 bankruptcy. And employment experts will be watching the bankruptcy proceedings closely because of their potential impact on retirees – since the ruling, by Judge Christopher Klein, leaves open the possibility that Stockton could stop or reduce its payments to California’s public-employee pension plan. . . .

 

As Diana Marcum reports this week in the Los Angeles Times, Stockton’s single biggest debt is the $900 million it owes over the next decade to the California Public Employees’ Retirement System, or Calpers, which administers pension funds for most of the local governments in the state. Pension obligations are one of the biggest problems for most struggling municipal governments, and the issue in general puts federal bankruptcy law—which gives bankrupt institutions a lot of leeway in restructuring their finances—in tension with state laws (including California’s) that require pension funding to take precedence.

Klein’s ruling, which declares that Stockton is eligible for bankruptcy protection, looks on its surface like a win for the pension fund. . . . Stockton’s other creditors had urged Klein to dismiss the filing, arguing that the city could pay more to its bondholders if it reduced its payment to Calpers. But while Stockton can now proceed with designing a debt-restructuring plan, Klein said the city’s pension obligations would remain open to consideration in future negotiations. And it’s hardly a given that bankruptcy judges will stand up for the state’s pension laws: In a related case, another bankruptcy judge ruled that Calpers couldn’t sue another struggling city, San Bernardino to force it to keep up with monthly pension payments to the fund.

The Wall Street Journal’s Katy Stech reports today that if judges do ultimately relieve bankrupted governments of some of those pension obligations, it’ll encourage many more cities to file for bankruptcy. That would almost certainly mean cuts in retirement benefits for current and future public-sector workers, and perhaps for present retirees as well."

Summing Up

What happens in Stockton's bankruptcy case will probably establish an extremely important precedent for local and state governments, public employees, pensioners, bondholders and citizen taxpayers throughout America.

My own common sense view based on the law is that some reasonable agreement will be reached which will reduce pensions for future retirees but leave current benefits in place for those already in or near retirement. 

At least that's the only logical and affordable solution that I see. And while such a 'solution' probably won't please many people, it at least will be 'implementable' and the most quasi-reasonable thing to do for all concerned.

Current and near retirees deserve to receive their promised pensions, and taxpayers and bondholders deserve to be treated equitably as well. Not like an uninvolved check writing rich uncle or unlimited disbursing ATM machine, in other words.

Accordingly, my guesstimate is that pension benefits will be reduced in the future (and perhaps even converted to a 401(k) plan), that employees will be required to contribute more, and that employees will also have to work more years to earn those benefits as well.

But of course, that's just my guess.

So now we will just have to wait to see what actually happens as the situation develops further both in Stockton and in many other American cities. But clarity for public sector pensions is definitely coming to America.

As a result, the enormous current uncertainty about Stockton's and other cities' various obligations, including the payment of employee pensions, will be coming to an end for retired and current workers, bondholders, public sector union officals, political leaders and citizen taxpayers as well.

That will prove to be a good thing for all concerned.

That's my take.

Thanks. Bob.