Landmark Decision Out of Stockton Could Change Playing Field on Pensions

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.”

Local Analysis:

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

About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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30 thoughts on “Landmark Decision Out of Stockton Could Change Playing Field on Pensions”

  1. South of Davis

    David wrote:

    > On Wednesday, a Federal Bankruptcy judge granted the city of Stockton
    > the right to reduce pension payment and possibly sever ties with CalPERS.

    This decision might be overturned (since we all know who runs California), but hopefully it will get more people to look at the math (including the MASSIVE shortfall in even the overly optimistic CalPERS numbers) and realize that we have no chance of paying all the baby boomers what was promised under the current system (even if we cut ALL other government spending). I have many friends in their 50’s that are retired with VERY generous government pensions (and free medical, dental, vision care for the entre family) and most of them can’t imagine that the government (aka us taxpayers) will have any problem paying “each” of them the millions of dollars “each” will get if they live to even an average old age (and millions more if they live longer)…

  2. Sam

    “Davis remains far from the situation of Stockton and Vallejo.”
    Right now they are, but that assumes that CALPERS makes no adjustment to their outrageous actuarial assumptions and increases contribution requirements on the city. CALPERS itself is saying that the pensions are only really about 40% funded. Soon with GASB 68 you will have an actual, reasonable unfunded liability on the City’s balance sheet. While Davis is not Stockton right now, it is racking up pension debt and is quickly getting there.

  3. Neutral

    Interesting that you’ve left out the part where Franklin Templeton is the *only* creditor suing the City (from the AP/Mercury News Story):

    The city has reached deals with all of its major creditors, except for Franklin, which took Stockton to trial.

    Of course FT’s current value – close to $34 BILLION – is simply not enough. They *must* get more return on their $32 *million* investment, and as a side benefit, crush the public employees ability to maintain a decent standard of living in retirement. By all means, let’s just keep destroying what little is left of the middle class to serve the interests of the moneyed few.

    1. South of Davis

      Neutral wrote:

      > They *must* get more return on their $32 *million* investment, and as a side benefit,
      > crush the public employees ability to maintain a decent standard of living in retirement.

      Odds are that (FT Billionaire) Charlie Johnson didn’t invest his own money in Stockton and that most of the $32 million was invested thousands of retired people on Social Security (who are getting on average about half of what retired government workers get) who invested their savings in a “safe” muni bond fund. Is it fair to take $10K from thousands of retired people in their 80’s on Social Security making $2K a month who invested in a “safe” bond fund so lots of retired cops and firemen in their 50’s can continue to get over $10K a month (+ free medical, dental and vision for the entire family).

      Maybe we can tell the people that worked for Stockton for a month that the city will no longer pay for their health care for LIFE:
      http://calpensions.com/2012/03/01/stockton-work-month-get-lifetime-health-care/

      1. Neutral

        Right. You’re claiming that *all* of those investments were made by SS recipients, who invested in Stockton’s municipal bonds? And further, they didn’t receive any of the dividend payments FT paid to the rest of their investors? Reads like those poor people should change their investment company.

        1. South of Davis

          Neutral wrote:

          > Right. You’re claiming that *all* of those investments were made by
          > SS recipients, who invested in Stockton’s municipal bonds?

          I never said that “all” the investors were SS recipients, but if you look at the ownership profile of most muni bond funds there is a good chance that “most” of them are. I’m no fan of the politically connected pro sports team owning billionaire Bohemian Club members that run FT, but it important to remember that “they” won’t take a hit if Stockton pays them nothing it is people like my great aunt who has a little money invested in a muni bond fund that adds to the money she gets from SS.

  4. Barack Palin

    Great news, hopefully it stands. Now municipalities can curtail out of hand pension costs when facing bankruptcy instead of raping citizens through higher and higher taxation to keep the public employee’s gravy train going.

    1. Tia Will

      BP
      “Now municipalities can curtail out of hand pension costs when facing bankruptcy instead of raping citizens through higher and higher taxation to keep the public employee’s gravy train going.”

      Let me rephrase your statement from a different perspective.

      Great news. Now municipalities can rape ( or at least break their promises to) long standing employees who were working for years in good faith under agreed upon contracts in order to keep the “gravy train of more money kept in the pockets of tax payers” going despite these agreements.

      1. Barack Palin

        OR……….

        Great news. Now municipalities can return to the taxpayers some of the way overpromised pay and benefits to public employees because their unions had bought and paid for the politicians who negotiated their huge contracts at the expense of the taxpayers who often are just scraping by on much less pay and benefits.

        1. Tia Will

          BP

          I think that we could play this back and forth game all day. The bottom line for me is that I desire a society in which no one has to worry about having enough to live on once they are too old to work.
          It should not matter whether the person has been a private sector worker who may not have managed to save enough despite a lifetime of work, or a public employee who has been the victim of over reach on the part of his union and now is subject to what essentially amounts to a life long financial plan which has fallen prey to a last minute “bait and switch ” on the part of the employing agency.

  5. Frankly

    All public sector defined benefit plans should be converted to defined contribution plans.

    But failing to implement this rational solution, no pension plan should exceed what California teachers have today.

    2% at 62 should be the top limit. Preferably it would be 2% at 65. Safety employees should be 2% at 58. Physical labor jobs should be 2% at 60.

    Retiree healthcare should be subsidized, but not at 100% of costs like it is today for most government employees.

    If any government employee wants to retire early or with a greater retiree lifestyle can do so on his/her own dime. They can put away more money, pre-tax, into supplemental retirement accounts up to the IRS limits (currently $17,500 per year, and another $5,500 if over 50).

      1. Tia Will

        BP

        “Great ideas, this is what most people in the private sector have to do.”

        And how is that working out for most people in the private sector ? I see an irony in the belief that because something is typically found in the private sector, it must be better. If the private sector makes it very difficult for an individual to provide for a comfortable retirement, how is that better than having a comfortable retirement ? Note that I am not suggesting that everyone be provided with millions in retirement with full health benefits. However, I do not feel that holding up a precarious strategy for having enough in old age to live comfortably as the “gold standard” is a reasonable premise.
        Perhaps there is some middle ground that acknowledges that no one whether in the private or public sector should work hard all their lives only to live in poverty in old age while still acknowledging that no one whether in the private or public sector should be guaranteed a lavish lifestyle at the expense of others. For me this is applicable whether the
        “others” are taxpayers, or whether the others are low wage workers in the company that you own, or own stock in.

    1. hpierce

      Frankly… you know that 2% @ 60 = 2.4% @ 65, right? So, if a teacher had worked 35 years by age 60, they’d be @ 70%; 35 years @ age 65 = 84%; 40 years @ age 65 = 96%…

      Glad you’re good with that.

    2. Tia Will

      Frankly

      “2% at 62 should be the top limit. Preferably it would be 2% at 65. Safety employees should be 2% at 58. Physical labor jobs should be 2% at 60.”
      I am not sure whether or not I agree with you. It would be nice to see how you decided upon the specific ages for different groups.

  6. Anon

    I wonder if this decision will make city employees consider taking less pension than they were promised, rather than have their pensions wiped out in a bankruptcy?

  7. TrueBlueDevil

    Davis might be able to avoid going BK, but can the State of California avoid going BK? Sacramento continues to underplay and understate the debt, while our governor bans single-use plastic bags and redefines “yes” to playing footsies.

    Last I read, Stanford estimates our total state debt at $1 Trillion?

    1. Don Shor

      while our governor bans single-use plastic bags and redefines “yes” to playing footsies.

      I think there were over 600 bills on the governor’s desk to sign or veto by Sept. 30. He didn’t write those bills. He just decided to sign them, along with a lot of others that were of much greater import.

      From the State Treasurer’s office, June 2014:
      Moody’s raised the State’s GO rating to Aa3 from A1. In making the upgrade, Moody’s cited the state’s rapidly improving financial position, high but declining debt metrics, adjusted net pension liability ratios that are close to the state median, strong liquidity, and robust employment growth.

      California won’t be going bankrupt.

      1. TrueBlueDevil

        But Governor Brown has done little besides pass some “temporary” taxes while he pushes through a White Elephant quasi-Bullet Train. (For the record, I was once for the bullet train, but given the skyrocketing costs are Caltrans ongoing disaster with the Bay Bridge, this thing will be a disaster.) No budget reform, no pension reform.

        I know why Democrats hide the true costs of our debts… because if we really knew how big it was, it would be tougher to pass other taxes, other tax-and-spend programs, other do-gooder programs, and tougher to get re-elected. At the same time, we’re bringing in millions of “undocumented” immigrants with minimal job skills, and limited formal education, who will be a net drain on our economy.

        The new taxes have just kicked the can down the road, again.

        1. Don Shor

          But Governor Brown has done little besides pass some “temporary” taxes while he pushes through a White Elephant quasi-Bullet Train.

          Very simplistic, but obviously we won’t get anywhere trying to debate this. Interesting how every discussion seems to veer into immigration, regardless of the actual topic.

          1. TrueBlueDevil

            Bloomberg View: EDUCATION
            California’s $600 Billion Sinkhole

            “…Some money has been set aside for teacher pensions in California but not nearly enough, and the state is already short $80 billion. But that is merely the value of the liability today. Unless cash is set aside, the shortfall will continue to grow zero-coupon style -– until it reaches more than $600 billion when the debt comes due in 2043.

            “To put that sum in perspective, it is 13 times the amount California’s general fund will devote to K-12 education this fiscal year and 11 times the amount that general fund will spend on everything else. Even if general fund revenue rises at a healthy pace until 2043, $600 billion will be the equivalent of two to three times the state general fund’s spending that year.”

            http://www.bloombergview.com/articles/2014-03-03/california-s-600-billion-sinkhole

            And this is just one account (debt).

            Frankly brings up another issue. I’ve had 4 or 5 family members and their partner / family move out of state the past 5 years. These have all been productive members of society, never on welfare, never a burden, and they are taking their assets and talents out of state.

      2. Frankly

        California government will not be going bankrupt because the politicians again looted from the producers. But while the downward sloping fiscal trend line for state government heading toward fiscal insolvency has been flattened and extended for now, it will eventually start heading south at a steeper angle as more and more producers leave the state.

        Said another way, the governor did what politicians have generally done, traded away our future only to pay our deficits today.

        The governor kicked the can down the road… again.

      3. TrueBlueDevil

        Those 600 bills were sent to him largely by his Liberal brethren. He could have said “Time is wasting, we have a pension crisis here, let’s get to work.” He didn’t.

          1. TrueBlueDevil

            Pete Wilson and the Duke were very pragmatic, Gray Davis spent like a drunken sailor, my guess is that he had his sights on the White House, but that blew up on him. Arnold got some worker’s comp reform, and then was blocked by the Democrats and voters in his reform attempts.

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