Viewpoints: Stockton’s bankruptcy and pension reform

The city of Stockton’s bankruptcy case is winding down, but the tantalizing issue of whether the city can or should use bankruptcy court to further reduce pensions that people have earned is still capturing media fascination. I thought I’d share an informed perspective and try to clarify this issue within the rubric of municipal bankruptcy.

First, I’d like to clear the air: CalPERS costs did not push Stockton into bankruptcy any more than it did the other 482 cities in this state. This was a narrative pushed by certain creditors in the earlier stages of the Stockton case because it served their interests. Immediately, the media echo chamber repeated it so often that it became established fact to almost everyone. This is not to say more pension reform is not necessary. We need more reform, but it must be statewide.

Second, no one is asking what happens if Stockton further reduces its CalPERS pensions, or explaining how it might work. It requires rejecting the CalPERS contract. Doing so will not produce any more cash for other creditors to divvy up in bankruptcy or to fund more services. Moreover, state law provides a financial incentive for employees to find another CalPERS job within six months after terminating the CalPERS contract. Stockton would experience a massive employee exodus, and retirees would experience a huge reduction in benefits, to well below the poverty line.

In order to be a viable municipality, Stockton would have to find a new retirement plan that would allow it to compete in the marketplace. In the end, Stockton doesn’t save money, and its capacity to provide services drops to dangerous levels. Moody’s latest pronouncement that cities will file for bankruptcy protection to get out from under their CalPERS bills is ridiculous, because once cities understand what happens in this scenario, they will quickly realize this will lead to their undoing as a viable city.

This is why Stockton’s creditors, at least at the beginning, and definitely Moody’s to this day, are dead wrong yet again.

After two years, no one has announced a cheaper CalPERS alternative that works in the California public sector. While it is delaying Stockton’s bankruptcy exit and causing more police officers to leave, the bankruptcy judge is taking additional time and digging beneath the CalPERS rhetoric. I think he will quickly see Stockton’s calculus for weighing the benefits vs. harm of impairing the CalPERS contracts.

Chapter 9 of the federal bankruptcy code and the criteria for success in these difficult situations is much different than the other bankruptcy chapters. Cities cannot disappear and be liquidated to pay their creditors like private companies. Moreover, cities need to be “service solvent,” i.e. provide adequate services, after exiting bankruptcy. At the outset, the judges in Stockton and Detroit focused on this point. Stockton could not impair its CalPERS contracts and ensure future service solvency, due to the effects mentioned above.

Virtually all local government employees in California are receiving a CalPERS or similar pension plan. How many large employers can ignore their de facto labor market standard and recruit substandard compensation? Knowing this, Stockton pursued a surgical plan that cut employee pay by 9 to 23 percent, completely rewrote labor contracts to save millions, and eliminated retiree medical benefits. We also restructured the massive debt the city owed and the financial service companies screamed about it, as have their allies at Moody’s. But what they ignore is that employees gave up 34 to 70 percent of their future retirement packages, depending on when they were hired. Many retirees gave up 34 percent of their retirement package, and many of them are not eligible for Social Security. What more do people want from them, and why?

We lost 100 police officers in a very compressed time frame due to the cuts mentioned above. What do you think they will do if Stockton goes after their pensions next? California cities have rigorous standards for hiring police officers. It takes 100 applicants to fill one police officer position, where they are given a gun and huge discretion in our communities. Stockton has highly trained paramedics and water or wastewater treatment plant operators. Would you have concerns with your airplane pilot or surgeon if they were getting substandard compensation?

I encourage people to look behind the ideology and beyond the rhetoric. As the city manager of Stockton, I consumed more time focusing on the safety of our citizens than most of my peers. My successor can ill afford the catastrophic effects from playing out people’s displeasure with CalPERS.