It was the shot heard around the pension world – a judge’s ruling that the city of Detroit can use bankruptcy laws to roll back its promises to employees and retirees.
But CalPERS officials, facing their own potential showdown in U.S. Bankruptcy Court, said Friday they doubt the Michigan ruling constitutes a threat to public employees and retirees in California.
In their first extensive comments on the landmark decision in Detroit, lawyers with CalPERS said California pensions carry major legal protections not found in Detroit.
“The differences between Detroit and the state of California and CalPERS are substantial,” said Gina Ratto, the pension fund’s interim general counsel, in a conference call with reporters.
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Nonetheless, she said, “We’re troubled by the Detroit bankruptcy decision, and we disagree with it.”
While the Michigan decision isn’t legally binding in California, “bankruptcy judges do rely on decisions out of other bankruptcy courts,” Ratto said. The ruling “creates concern on the part of public servants around the country.”
The issue is hardly academic in California. The bankrupt city of San Bernardino already owes about $14 million in overdue pension contributions and has publicly suggested it wants to reduce its $24 million annual payment to CalPERS.
Despite the opinion of CalPERS’ legal team, several experts have said the Detroit ruling could strengthen San Bernardino’s legal position as the city negotiates with the pension fund and other creditors.
The Detroit judge said pension promises are essentially the same as contracts, and contracts can be “impaired” in bankruptcy. That means they can be reduced. Detroit hasn’t yet submitted an actual proposal for lowering its pension expenses, and the judge’s ruling is being appealed by municipal unions.
Unlike Detroit, CalPERS’ pensions are safeguarded by state law and the state constitution, according to Ratto and another CalPERS lawyer, Michael Gearin.
“We feel very strong about our case here,” said CalPERS spokesman Robert Udall Glazier.
San Bernardino’s City Council tentatively approved a plan for dealing with its debts in October, but the proposal is confidential while the city negotiates with creditors under supervision of a mediator. The inital negotiations in late November were “very promising,” Ratto said, but she wouldn’t elaborate because of the confidentiality ruling. Negotiations will resume Jan. 9 in Los Angeles, she said.
Glazier struck a conciliatory note, saying CalPERS is sympathetic to cities struggling to pay their pension bills. “We’re committed to working with them,” he said.
On the other hand, Ratto said “it’s a criminal act” for a city to make payroll but not make its pension contributions. She said CalPERS isn’t planning to seek charges against San Bernardino officials, however.
What’s unknown is whether the Detroit ruling will influence the political climate in California. The mayor of San Jose, Chuck Reed, is promoting a ballot initiative to give government agencies leeway to impose cuts in pension costs.