Real & Raw: City Bankruptcy vs. Civil Service Pensions

It’s official; Stockton has no bread, Fred. Thus, the city of Stockton is eligible for bankruptcy protection ruled a federal judge. The ruling by U.S. Bankruptcy Judge Christopher Klein means that the city can continue to seek protection from its creditors as the largest city in America to declare bankruptcy. (Interesting epitaph, no?)

Ah, but all this sets up a Battle Royale that, debt issues or not, other cities throughout California will be reviewing: Municipal Bankruptcy vs. Having to Pay Existing Civil Service Pensions. The decision establishes a legal battlefield to answer the musical question: Can public workers' pensions be cut if the cities they work for are in dire financial straits? (i.e., BANKRUPT!)
 
Judge Klein depicted Stockton has having negotiated in good faith with creditors that insure city pension bonds and issued bonds for a downtown redevelopment. And he found the city took major steps to right its fiscal ship, including a 25 percent reduction in its police force and major cuts to city staff and services. By the time it sought bankruptcy protection last summer, the city had slashed $90 million in three years.

Add to that this major factoid: Stockton was (and somewhat remains) the poster child for housing foreclosures and the national mortgage crisis.

Many states have statutes and constitutional provisions making it illegal to cut public workers’ pensions. Until now though, there has been no major test of those laws regarding bankruptcy — particularly not in California, where the big state pension system known as CalPERS has been girding for battle on this issue, trying to avoid the precedent of a cutoff or shortfall in a city’s pension contributions.

(BTW: The City of San Jose somewhat ameliorated the matter - though they were far from having to delcare bankruptcy - when the electorate overwhemlingly approved Measure B recently which put in place new pension reforms. But guess what? And yes, I know this will come as a shock - he wrote tongue-firmly-in-cheeck - but the unions have filed a lawsuit to thwart the will of the voters. That's worth a while 'nother blog post of its' own.)
 
As was noted by one financial expert, federal bankruptcy law often trumps state laws, but municipal bankruptcies are so rare that there is almost no precedent on how to apply the law to state or local pension provisions. This is going to get uglier before it gets resolved – count on it.