It will likely take some time to figure out the ramifications for cities like Davis, who are struggling to stay in the black, faced with a huge amount of increased costs due to increased costs on pensions. On Wednesday, a federal bankruptcy judge granted the city of Stockton the right to reduce pension payments and possibly sever ties with CalPERS.
What this will ultimately mean remains to be seen.
CalPERS (California Public Employees’ Retirement System), who fought the ruling on Wednesday, would issue a statement in response to the federal bankruptcy judge’s ruling that pensions can be impaired in bankruptcy proceedings.
They said, “We disagree with the Judge’s opinion on the issue of pension impairment. This ruling is not legally binding on any of the parties in the Stockton case or as precedent in any other bankruptcy proceeding and is unnecessary to the decision on confirmation of the City of Stockton’s plan of adjustment.”
They add, “CalPERS will reserve any further comment until such time as the court renders its final written decision. What’s important to keep in mind is what the City of Stockton stated in court today: that they can’t function as a city if their pensions are impaired.”
However, as the Bee article this morning points out, “A bankruptcy judge handed CalPERS and organized labor a decision they’ve long feared Wednesday, declaring the city of Stockton has the right to reduce pension payments and even sever ties with the powerful pension fund.
“The verbal ruling from U.S. Bankruptcy Judge Christopher Klein was groundbreaking,” the Bee continued. “It pierced CalPERS’ aura of invincibility and made clear, for the first time, that public employee pensions in California aren’t sacred.”
That Stockton may not have a vested interest in doing this is less important than the fact that they could.
As the Bee notes, the ruling was prompted by the final litigant, Franklin Templeton Investments, “which is due to be repaid just $4 million on a $36 million loan it made to the city during better economic times. Franklin wants a better deal from Stockton even if it comes at the expense of the pensions.”
“If Stockton gets Klein’s approval and can resolve its bankruptcy without slashing pensions, the impact of Klein’s ruling is blunted somewhat. But Klein won’t rule on the city’s plan until Oct. 30,” the Bee writes.
Stockton understands that if they decided to impair CalPERS it could turn the city into a war zone with no police officers. “The city cannot impair pensions and continue to function as a city,” said Stockton lawyer Marc Levinson during arguments.
As the Bee notes, the CalPERS attorney was able to downplay the decision, arguing that it will not force the city to cut pension payments. He stated, “It doesn’t establish a precedent. Those were his comments about a hypothetical city.”
However, other observers are not so sure. The judge for the first time opens the door to a city impairing PERS, which sends a shot across the bow of CalPERS that, if they do not get their act together, cities will begin to bail out of the system.
For years, the Vanguard and others have warned that continuing with CalPERS on such an unsustainable path will be detrimental to both the cities and other local governments, as well as ultimately to the employees.
While the governor put forward a package of pension reforms a few years ago, the key provisions are forward looking – for new employees – rather than future reductions for current employees.
Writes the Bee, “Until now, public pensions in California were believed to be off-limits, even if the government provider went bankrupt. Lawmakers could scale back benefits, but only for newly hired workers, as the Legislature did last year.”
The Bee notes, “Dan Pellissier, a pension-reform advocate, welcomed the ruling. But he said Stockton, by sticking with CalPERS, is squandering an opportunity to reduce its pension costs and spend the savings on more police, firefighters and city services.”
The question many locally will ask is whether this ruling impacts Davis. The answer appears to be not directly. Right now, the city is not in danger of bankruptcy. The city’s debt remains low and, while it is struggling to improve revenues, the worst problems the city faces are deferred maintenance, but sources have told the Vanguard that, even as high as costs could soar, roads could continue to deteriorate another five to seven years before things are really bad.
The city can survive bad roads, but if we wait until then to try to fix them, we will never catch up and much of the town could end up looking like the portion of Olive Drive that has yet to be repaired.
Davis remains far from the situation of Stockton and Vallejo. Far less of Davis’ budget is dedicated to public safety, which represents 80 percent of the general fund in both of those cities.
Stockton had a huge amount of debt dedicated to the General Fund. In San Bernardino, they just ignored the impending fiscal crisis until it was too late.
What this does, however, is cracks open the door to the possibility that the vested right of pensions can be pierced, at least under some conditions.
Therefore, we tend to agree with Mr. Pellissier, that Stockton by sticking with CalPERS diminishes the impact of the ruling and is squandering an opportunity to reduce pension costs. Where we differ is that we can understand why Stockton does not want to go that extra step at this point if it doesn’t have to.
—David M. Greenwald reporting