Dan Walters: Bankruptcy filings by California cities may rein in pensions

dwalters@sacbee.comNovember 5, 2012 

As financially troubled cities suspend their payments to California's pension fund, federal bankruptcy judges may have the final word on the long-assumed inviolability of retirement benefits.

Neither Vallejo nor Stockton mentioned pension rights of current or retired employees when they filed for bankruptcy protection, even as they sought relief from holders of bonds and other creditors. But companies that had insured hundreds of millions of dollars in Stockton's bonds mounted stiff resistance, contending that if they had to take a financial haircut, the city's retirees should as well.

The California Public Employees' Retirement System geared up for legal war, insisting that pensions are sacrosanct.

That issue is still pending, but the Sacramento bankruptcy judge handling the Stockton case ruled in a related issue that Stockton's contractual health care obligations to its retirees could be voided under federal bankruptcy law, thus heightening legal uncertainty about pensions.

Then San Bernardino filed for bankruptcy protection, listing CalPERS as its largest single creditor at more than $140 million, and stopped making pension fund payments.

Once again, CalPERS geared up for legal war and asked the judge handling the San Bernardino case to reject the bankruptcy petition, saying the city was trying to improperly renege on its pension debts.

That issue, too, is still pending.

And then Compton, which hasn't yet sought bankruptcy protection but may be headed in that direction, stopped making its payments to CalPERS, at least temporarily. Compton owes CalPERS nearly $3 million.

Again, CalPERS geared up for legal war, filing a lawsuit against Compton to compel it to make payments.

Paperwork filed by San Bernardino illustrates how rapidly rising pension costs have hammered many California cities. The city says in its filing that retirement costs had escalated from $6 million in 2000-01 to $22 million in 2009-10 and are projected to hit $24 million in a few more years.

"The increased retirement costs that the city will experience are unsustainable," the city says, "and therefore immediate major intervention is necessary now."

On one level, cities suffering pension-cost angst don't deserve our sympathy. They expanded pension benefits, especially those for high-cost police officers and firefighters, with little regard to future impact.

But CalPERS encouraged those increases by supporting legislation to raise state employee pensions in 1999, claiming that investment gains would easily pay for them, not taxpayers.

Moreover, much of the cities' added costs are being imposed by CalPERS to make up for the horrendous investment losses that the pension fund incurred in the last decade.

A day of reckoning is coming, and it may come in federal bankruptcy court.

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