Implications for California as Detroit seeks to slash pensions

Published: Friday, Feb. 21, 2014 - 9:58 am

In a case with significant implications for public pensions in California, the bankrupt city of Detroit proposed slashing retirement benefits by up to 34 percent in a plan unveiled Friday.

The city, which is $18 billion in debt, would cut pensions 10 percent for retired police officers and firefighters, and 34 percent for other municipal retirees as it tries to resolve the largest municipal bankruptcy in American history. Unsecured creditors would receive about 20 percent recovery, in the form of new securities issued by the city.

Detroit’s plan is being closely watched in California, where two cities are trying to exit bankruptcy and other cities are facing financial stress over rising pension costs. The city of San Bernardino has hinted that it might try to reduce its $24 million-a-year bill to CalPERS, although it hasn’t yet filed a reorganization plan. Last fall the city of Stockton proposed a bankruptcy plan that leaves pensions untouched but restructures much of its bond debt.

On Thursday, Moody’s Investors Service warned Stockton and San Bernardino that they must tackle pension costs or else risk returning to insolvency. Moody’s also noted that Vallejo, which resolved its bankruptcy without cutting pensions, is facing renewed financial problems and “now faces the risk of a second bankruptcy.”

And earlier this week, the governing board of the California Public Employees’ Retirement System set in motion a new round of rate increases to deal with the increasing life expectancy of hundreds of thousands of retirees in California. The increases for municipalities and school districts are expected to be substantial, although they won’t start until 2016 and will be phased in over five years.

Adding to the tension over pension costs in California, San Jose Mayor Chuck Reed is backing a ballot initiative that would give state and local governments broad powers to reduce pension costs. In December, a Superior Court judge shot down a voter-approved measure that cuts workers’ pensions in San Jose. But the judge said the city could reduce workers’ paychecks to achieve the same savings.

The Detroit case is significant for California, many bankruptcy experts say, because the ruling could open the door for rollbacks of state pension benefits. The bankruptcy judge in December ruled that Detroit could use bankruptcy to scale back pensions for current workers and retirees, the first time that’s ever happened.

But officials with CalPERS said California pensions have additional legal protections not available to workers in Detroit. Notably, California public pensions are protected by state law and the state constitution, according to lawyers for CalPERS.

Still, “we’re troubled by the Detroit bankruptcy decision, and we disagree with it,” CalPERS lawyer Gina Ratto said in December.

Call The Bee’s Dale Kasler, (916) 321-1066. Follow him on Twitter @dakasler.

Read more articles by Dale Kasler

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