A federal bankruptcy judge issued a ruling Wednesday that could fundamentally transform public pension systems, and open the doors for state and local governments to cut pension benefits to workers going forward.
The ruling during a hearing on Stockton’s efforts to exit bankruptcy, did not order the city to cut its pension plan or take any specific action.
Judge Christopher M. Klein said that he needed more time to ponder on Stockton’s situation and that he would decide Oct. 30 whether to accept the city’s plan to end its two-year-long bankruptcy.
The ruling was a blow for CalPERS and organized labor, who have fought to protect the sanctity of pensions, even in cases of municipal bankruptcy. The preliminary decision would give cities the right to reduce pension payments and even sever ties with the powerful pension fund.
The Sacramento Bee called the ruling “groundbreaking”
“It pierced CalPERS’ aura of invincibility and made clear, for the first time, that public employee pensions in California aren’t sacred. Two years after Stockton filed for bankruptcy protection, buried under more than $200 million in bond debt, a judge has declared that a municipality can walk away from its obligations to the California Public Employees’ Retirement System.
The shockwaves were quickly felt around the state and around the country.
“Wall Street applauded the ruling. Moody’s Investors Service today called the decision “a positive sign for investors that pension obligations will not be given preferential treatment over debt in a municipal bankruptcy.” Moody’s added that it could prompt other stressed municipalities to “consider bankruptcy as a way of trimming unaffordable and growing pension burdens.”
Unions, not so much.
“We are disappointed that the judge has sided with Wall Street in a decision that has the potential of devastating citizens, employees, and making bad situations worse,” said Dave Low, Chairman, Californians for Retirement Security, a coalition of more than 1.2 million teachers, police officers, firefighters, school employees, retirees, and other public employees As Stockton's city attorney noted, if cities break the promises made to employees, it will result in a mass exodus of police, firefighters and other public employees who will have no incentive to rebuild bankrupt cities."
In Sacramento, fights over municipal bankruptcies have come to the state Capitol, pitting local leaders against fire, police and other unions. Lawmakers have passed bills making it harder for cities and counties to file for bankruptcy, arguing that local leaders were using it as a way simply to get out of paying labor contracts and pension benefits.
Gov. Jerry Brown has voiced his support for pension reform, making it a centerpiece of his 2010. While Brown did muscle pension legislation through the Capitol during his first term, he stopped short of reducing benefits, even unvested future benefits, for current employees, citing legal debate over whether that could be done.
If the Stockton ruling stands, it could refuel the pension debate in Sacramento and add additional fire to efforts to curb benefits not only for future employees, but current workers as well.
Stay tuned…