Public employee union leaders have always argued that pension obligations between state and local governments and their employees are a contract. As such, they are unbreakable. Under that theory, pension benefits are vested rights conferred when a government worker is hired.
The California Public Employees' Retirement System has consistently supported that view. Even when hard-pressed municipal governments stopped paying their other creditors, CalPERS has always insisted that cities must pay their pension obligations.
Recently, however, municipal bankruptcy proceedings in Stockton and San Bernardino have challenged the primacy of pension contracts. Insurers for banks, bondholders and local vendors that supply everything from paper clips to janitorial services argue that if they have to stand in line for the money they're owed by insolvent cities, so should all other creditors, including the state retirement system.
Attorneys for CalPERS are suing the financially broke city of San Bernardino, which has stopped paying the state pension fund. Meanwhile, insurers for Stockton bondholders are suing to prevent that city from entering into bankruptcy. Even though Stockton has stopped paying its bondholders, banks and other creditors, the insurers complain, the city has not stopped payments to CalPERS, its biggest creditor.
CalPERS and its attorneys argue that as an arm of state government, the retirement system has a special relationship with municipalities. That relationship is "an aspect of the state's control over a municipality that is protected from interference" even from a federal bankruptcy court.
The complicated legal wrangling will end up in federal bankruptcy court next year. It's all being watched closely by beleaguered state and municipal governments across the country and by government workers and pensioners.
As the litigating parties and the federal bankruptcy judge work to sort out this mess, we should take time to remember an idea floated by the Little Hoover Commission last year. Before San Bernardino and Stockton filed for bankruptcy, this commission warned that many local governments' pension situations were dire. It suggested that cities and the state freeze pension benefits, allow existing workers to keep what they have earned to date, but reduce the formula in future to lower more affordable rates. The state pension system, the Legislature and public employee unions rejected that suggestion, insisting that promised pension benefits were sacrosanct and that reducing even benefits not yet earned would violate the law. The Stockton and San Bernardino bankruptcy cases should prompt them to rethink their positions.
Consider Stockton. It has been forced to cut its already dangerously understaffed police force by a fourth since 2008. The number of murders in the city has tripled in the four years since then. Had Stockton been able to negotiate a reduction in future pension rates along the lines recommended by the Little Hoover Commission, could it have avoided layoffs, preserved its police force, reduced the carnage in the streets and avoided bankruptcy?
As the municipal bankruptcy cases wind their way through court, those are the questions that municipal leaders, legislators, the pension system, workers, unions and the public need to consider.