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Editorial: Stockton bankruptcy case should be a loud warning to cities

A judge’s potentially groundbreaking ruling in the Stockton bankruptcy case should send messages loud and clear.

To the Legislature – that it can’t rewrite federal bankruptcy law. To the city of Stockton, Franklin Templeton Investments and CalPERS – that they need to make a deal. And to local officials across California – that they need to get more serious about pension reform.

In his verbal ruling, Judge Christopher Klein declared Wednesday that public employee pensions are not off-limits in bankruptcies. He suggested that insolvent California cities could choose to reduce already-promised pension payments and even walk away from the California Public Employees’ Retirement System.

The city of Stockton does not plan to do that. Under its reorganization plan, it pledges to keep making its $29 million annual payment to CalPERS. Because the settlement calls for Franklin Templeton to get back only $4 million of the $36 million it loaned the city, the San Mateo-based firm went to court to get more, even if the money comes out of pensions. By delaying a decision on the reorganization plan until Oct. 30, Klein left an opening for a compromise.

This entire ugly spectacle ought to refocus local officials on their financial reality: If they don’t control long-term retirement costs, those obligations will consume tax dollars at the expense of services to residents and jobs for current employees.

Many cities and counties have started trying to dial back pensions, reducing benefits for new hires and requiring employees to pay their full share of CalPERS contributions.

Because these changes are being made through negotiations with unions, local governments are often having to hand out pay raises and other sweeteners in return. And because they were far too generous for much too long, it is going to take years for significant savings from pension reform.

Some 2,000 local agencies are facing higher payments to CalPERS now and for the foreseeable future. Yet at the same time, a majority of the CalPERS board is enabling local governments to hand out even more benefits. In August, the board voted 7-5 to count more than 100 kinds of supplemental and temporary pay in calculating pensions for employees hired after Jan. 1, 2013. The majority ignored pleas from Gov. Jerry Brown, who correctly warned that the move undermined pension reform passed two years ago.

That’s the broader context for the Stockton case. While there’s a lot of uncertainty, and there’s always the possibility that the ruling could be overturned on appeal, some basics ought to be beyond dispute.

The city of Stockton overpromised and overspent, and buried itself in more than $200 million in debt. Franklin Templeton and other creditors made bad bets. And the biggest losers are the working people of Stockton, who will be paying for these mistakes for years to come. About 2,400 retirees have lost their city-paid health insurance, while residents are getting slammed by $90 million in budget cuts and by higher sales taxes to shore up public safety.

If other cities don’t learn the right lessons, they could put their citizens in similar straits, even if they don’t flounder all the way into bankruptcy court.