A federal bankruptcy judge in Sacramento has announced his intention to ignore years of legal precedent in the city of Stockton bankruptcy case.
Some claim his decision may open the door for cities around the country to use bankruptcy as a tool to undercut retirement security for public employees. His decision is bad for public employees, for citizens in these cash-strapped cities and for the retirement security of our aging population.
The net effect of Judge Christopher Klein’s decision, if upheld by higher courts, would be another win for Wall Street at the expense of the middle class, where most workers are unable to save enough to retire.
In his verbal ruling, Judge Klein stated that Stockton could legally refuse to pay its pension commitment because it is a simple contract that can be easily broken in bankruptcy. His ruling allows Franklin Templeton Investments, an unsecured creditor, to receive preferential treatment over public employees, despite the fact that Franklin managers knowingly put themselves in their current position.
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As Michael Hiltzik of the Los Angeles Times points out: “The argument that employees and retirees are just like any unsecured creditors and should simply stand in line for a payout … is pure Wall Street sophistry. Bondholders know when they make their investments that any return is contingent; that’s why bond interest rates vary according to the security and creditworthiness of the borrower.”
Let’s be clear about this: Working people are different from institutional investors. A portfolio manager can diversify his firm’s investments if a fund performs poorly. Workers, on the other hand, invest their working lives, their family’s well being and their retirement security in exchange for the employer’s pension promise.
Public employees often forgo other opportunities and decide to stay at an agency for perhaps their entire careers because of the negotiated commitment from their employer.
All Californians should be deeply disappointed that the judge has sided with Wall Street in a decision that could be devastating to public employees and their families, as well as the taxpayers of any city that may be on a financial precipice.
As Stockton’s leaders have noted, if the city breaks its retirement promises, it will result in a mass exodus of police, firefighters and other employees, who will lose any incentive to rebuild the bankrupt city.
Furthermore, Klein’s ruling ignores a well-vetted recovery plan developed by Stockton leaders that cuts benefits to many new retirees and workers, but continues to honor vested pension promises. Many employee unions have been willing to negotiate solutions to their city’s financial challenges, including paying a higher percentage of their pension cost, and these agreements should be respected by the courts.
In addition, the state passed legislation to end abuses such as pension spiking. Together these actions have saved billions of dollars in pension costs and have provided workers with greater retirement security.
No party is more interested in strengthening public pension systems and keeping cities solvent than the workers who count on those pensions to retire.
For the 30 percent of public employees who do not receive Social Security, public pensions are their only source of income for retirement. The average retired public employee receives about $2,500 a month, and pensions are vital to avoiding poverty and destitution for our older Americans, according to the National Institute for Retirement Security.
We should not let Wall Street win at the expense of the middle class. Let local leaders continue to engage their local bargaining units and to reach meaningful compromises to ensure economic stability and retirement security for those who have given their lives to public service.
Yvonne R. Walker is president of Service Employees International Union, Local 1000, and serves on the California Secure Choice Retirement Savings Investment Board.