Analysis: Future of Pensions May Hinge on Stockton Decision

pension-reform-stockDan Walters had an interesting column yesterday, writing that “Judge Christopher Klein has strongly hinted that he’s willing — perhaps even eager — to declare that city employee pension obligations are debts that could be trimmed along with those of more conventional creditors.”

That would be a major change in the way pensions are viewed, which right now are viewed as a vested right.

As CalPERS (California Public Employees’ Retirement System) notes, “The California Supreme Court long ago established that a promise of a pension made by a public employer to its employees is a promise the employer must keep. In other words, public employers in California are legally required to honor promises to current and former employees regardless of how much money they have set aside for that purpose.”

CalPERS defines a vested benefit as follows: “A ‘vested’ benefit is one that has matured into an irrevocable contractual right, which cannot be taken away or otherwise impaired without the member’s consent, except in extremely limited circumstances.”

They add, “The fundamental doctrine protecting California public employee pension rights is succinctly stated: ‘A public employee’s pension constitutes an element of compensation, and a vested contractual right to pension benefits accrues upon acceptance of employment.  Such a pension right may not be destroyed, once vested, without impairing a contractual obligation of the employing public entity.’”

From a practical perspective, this meant there was a limited amount that the legislature and governor could do to change present liabilities. But that might all be changing.

Judge Klein called this “a festering sore” and said, “We got to get in there and excise it and figure out what the story is.”

Wrote Mr. Walters on Monday, “Klein’s obvious leanings have drawn strenuous objections from the California Public Employees’ Retirement System (CalPERS). It has advanced several legal theories as to why pensions should be exempted from the haircuts other creditors are taking.”

At first, Mr. Walters writes, CalPERS relied “on a section of the state constitution prohibiting the impairment of contracts,” but, he continues, “(Judge) Klein undermined that theory when he reminded attorneys that ‘bankruptcy is nothing but the impairment of contracts.’”

He continues, “When Detroit filed for bankruptcy, the judge in its case flatly declared that pension obligations would be treated like other debts and could be modified. But CalPERS insisted that California was different because it is a state agency and therefore has sovereign immunity.”

Dan Walters reports, “Last week, however, Klein more or less dismissed that argument as he indicated again that he’s inclined to declare pensions to be fair game in bankruptcy proceedings.”

The real creditors on pensions are the current and potential city retirees, while CalPERS “is in effect a servicing agency,” Judge Klein said.

“San Bernardino, after initially saying it wanted to reduce pension debts in its bankruptcy and incurring CalPERS’ wrath, has shifted and has a recovery plan that doesn’t include pension cuts,” Mr. Walters continued. “Stockton has never wanted to touch pensions but one of its creditors — the only one without a settlement deal — claims that ignoring pension debts is unfair to other creditors.”

Mr. Walters reports, “Klein said last week that even if Stockton makes deals with all its creditors, he may still declare pension debts to be at risk, implying that he wants appellate courts to end the uncertainty.”

He invited parties in the bankruptcy case to “straighten me out before I make some dramatic boneheaded mistake” about the status of pensions, however, Mr. Walters writes, he “left no doubt that he was leaning in that direction.”

He argues, “Klein’s remarks provide a pathway to settling the issue without visiting more pain on Stockton’s current and future pensioners, who already have seen cutbacks in their health care. If all creditors agree, Stockton’s bankruptcy could end amicably, but with a pension ruling that CalPERS would certainly take to the appellate courts to prevent its being an immediate precedent.”

He concludes, “Coupled with what happened in Detroit, that process would result in a definitive ruling so that local governments everywhere and their creditors would know the risks of insolvency, rather than fighting them out case by case.”

As a staunch critic of the current pension system, but one sympathetic to defined benefits, I have mixed feelings on this development. A trial court judge is not going to be the final arbiter in this long-running legal question; ultimately the State Supreme Court is going to have to weigh in and possibly the US Supreme Court.

This would be a huge setback for CalPERS, which has relied for years on the fact that pensions are vested rights –  promises made to employees that cannot be rescinded.

On the other hand, the excesses of the pension system have been obvious for years and, while the state has attempted to reform how pensions are done in the future and the cities like Davis have asked employees to pay for a broader share of their pensions, it has always seemed odd that cities cannot prospectively change pension formulas going forward, even though they could retroactively increase pension formulas going backward.

It makes me recall once again the debate I had with the members of the California Labor Federation.

It was December of 2009.  I had been leading the way, pushing for pension reform while speaking out against the local firefighters’ union.  It’s probably not the best idea when your wife is a union organizer and you walk in union circles.

What happened next would be a huge wakeup call, at least for me.  My former boss, when I worked in Sacramento, asked me if I would meet with some representatives from the California Labor Federation, as they had some concerns with my writing.  My policy was and is that I’ll talk to anyone, and so, across the street from the Capitol Building, I met with what turned out to be two representatives from the California Labor Federation.

It quickly became clear that this was not going to be a discussion.  My view then, as it is now, is that there is a world of difference between fighting for the rights of people making less than $30,000 a year and protecting the salaries of those making $150,000 to $200,000 in total compensation.  If we do not figure out how to rein in those salaries and create a working pension reform, we will have the Proposition 13 of pension reforms rain down on us.

They did not see it that way.  They gave me slogans like “united we stand, divided we fall.”  They told me that without the firefighters in 2005 on the labor lines, the governor’s reform package might have been approved.

But back in 2009, I warned these leaders that if reforms did not come, we would likely see a Prop 13 of pension reforms.  While I think pensions have become excessive, I still support the concept of defined benefits.

They have managed to get only a modest measure by Governor Brown and to avoid more draconian measures such as the proposals from the Democratic Mayor of San Jose, Chuck Reed. But the time is coming and the writing is on the wall.

If a court ruling from Stockton becomes the law of the land, the game will change. Then the question will become under what conditions employers can change pensions going forward.

—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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20 Comments

  1. South of Davis

    The pension cuts have already started and they will (slowly) continue to try and hide the fact that CalPERS is nothing but a Ponzi scheme that will crash without growth (that we can get by letting millions of illegal workers in to the state).

    The LA Times wrote (in 2011):

    “CalPERS has also dramatically cut the pensions of top officials in Bell after an audit determined that they were improperly inflated, according to records obtained by The Times under the California Public Records Act.
    Former City Administrator Robert Rizzo is now set to receive $50,000 per year. Before, he had been poised to get $650,000 a year from CalPERS and more than $1 million annually overall when a second pension from the city was included. The pension of his assistant, Angela Spaccia, was slashed from a projected $250,000 to $43,000. The aggressive review comes amid criticism of high pensions paid to some officials, even those accused of wrongdoing.”

    http://articles.latimes.com/2011/aug/09/local/la-me-pension-rollbacks-20110809

    Like David I am “sympathetic to defined benefits” but sadly the goal of the (mostly older) guys running the system is to “get theirs” and hide the problems as long as possible as they make as much as possible knowing the money is not there (They are not working hard to “hide” things since even when the “official” CalPERS reports say they only have about half the funds they need almost no one seems to care)…

    1. Frankly

      The idea of defined benefit pensions died 25 years ago. It died because of the problem of risk-shifting. As we discovered with the Great Recession, there is a risk catastrophic loss in returns. Certainly that risk is why many people support defined benefit pensions, but it is the scope and scale of the commitment to beneficiaries now pits those without defined benefit pensions against those that do.

      Then there is the problem with job-locks… the circumstance where just-waiting-for-retirement, burned-out, uninspired, unmotivated and grumpy public sector employees bring down the work culture and establish general performance mediocrity.

      Defined benefit pensions are a thing of the past. We need to convert all retirement plans to defined contribution plans. Employees need to own the balance on their retirement accounts and be able to leave a job that is not a good fit or when they get burned out doing the same thing.

      1. Tia Will

        Frankly

        “Defined benefit pensions are a thing of the past. We need to convert all retirement plans to defined contribution plans”

        This does not need to be an either or situation. Kaiser has what is essentially a hybrid with a portion of ones retirement as “defined benefit” and a portion as “defined contribution” which provides a “safety net” as well as an incentive to save.

        “Employees need to own the balance on their retirement accounts and be able to leave a job that is not a good fit or when they get burned out doing the same thing.”

        I agree wholeheartedly with the last part of your statement that employees need to be able to leave a job that is not a good fit …..”. But pensions are only part of the problem with lack of job mobility. I find it inconsistent that you state that there were “only two problems with our health care system ” prior to Obamacare. A third huge problem, which we still have is that affordable insurance is still pegged, although not as closely, to employment. Anyone that cannot see that linking health insurance to employment, especially at a time of high unemployment is materially harmful not only to the individual, but to all taxpayers who are left paying for the most expensive care possible ( emergency) instead of focusing on the most cost effective care ( preventative) is either not considering the increased cost to the taxpayer or is willfully ignoring it.

        1. Frankly

          I don’t have a problem disconnecting health care insurance as a job benefit and just making health insurance a consumer product like auto insurance, but it just means that people would have to be responsible for not buying a new car with their extra compensation instead of buying insurance. And if they did buy a new car instead of insurance, then allowing them to suffer the pain of having to pay more for their insurance over pre-existing conditions.

          One way we can motivate people to buy health insurance independently is to provide them a tax credit for equal to their tax liability for the extra income that employers would pay in lieu of health care benefits.

          There is one justified reason for employers providing health care benefits to their employees though. For example, I provide them and also a wellness benefit. This comes down to a business perspective of protecting my valuable business assets… the people that work for the company.

          But what about all those people that don’t work?

          The political left needs to look in the mirror for their policy demands and political discourse and be honest about how that has led, and is leading to, a drop in economic growth. And that drop in economic growth means more people out of work and then more people that cannot afford healthcare.

          Economic activity is required to generate the money to pay for health care costs in any scenario you want to throw out there. If government policy is causing less economic activity that could otherwise be developed and grown, the government is contributing to the problems of limited health care access.

          1. Don Shor

            And if they did buy a new car instead of insurance, then allowing them to suffer the pain of having to pay more for their insurance over pre-existing conditions.

            Pre-existing conditions should not even be a factor in the pricing of insurance policies. We have no control over the existence, nature, and cost of our pre-existing conditions. They just happen. If consumers want to pay more for better coverage or lower out-of-pocket, that’s our prerogative. And that option exists right now under the ACA.

          2. Frankly

            Pre-existing conditions are only a factor when people choose not to purchase insurance. Basically taking risks. Sorry Don, you cannot take personable responsibility out of the equation and come up with a system that works.

            I agree that no insurer should be able to refuse or cancel a policy due to health conditions.

            And I agree that no insurer should be able to charge a premium for people with contiguous coverage that have pre-existing conditions.

            But all insurers should be able to charge a premium to customers that have a lapse in coverage if those customers have pre-existing conditions.

            Except for when they can prove financial hardship that caused them to not be able to afford health insurance.

            This would have been a reasonable approach that kept health insurance as a reasonably-regulated free market product instead of a government bureaucracy nightmare that cannot even get a website to work in three years and hundreds of billions of tax payer dollars.

            In the model I outline Don, you would have been covered and Obamacare would not have been necessary. You know this, but I doubt you will admit it because your track record is to defend Obamacare to the bloody end.

          3. Don Shor

            And I agree that no insurer should be able to charge a premium for people with contiguous coverage that have pre-existing conditions.

            But all insurers should be able to charge a premium to customers that have a lapse in coverage if those customers have pre-existing conditions.

            You completely fail to understand what insurance companies were doing. Refusing insurance. Cancelling policies. Pricing them so high they were literally ridiculous. Refusing to cover the pre-existing conditions (which made the insurance useless). Every one of my lapses in coverage was caused either by the insurance company or by my inability to find an affordable or effective option. This ‘lapse in coverage’ nonsense that Republicans keep harping on would apply to nearly everyone who had pre-existing conditions. WE didn’t choose to get them. Pre-existing conditions are not always, or even usually, related to choices that we make.
            To whom were we going to have to “prove” our “financial hardship?” The government? The insurance company?
            I will defend Obamacare to the bloody end because no Republican plan ever would have achieved the extension of coverage that the ACA does, and no Republican proposal would have covered the situation that those of us with pre-existing conditions found ourselves in. It was a crisis. The ACA solves that crisis.
            The ACA works. Nothing any Republican or conservative has ever proposed comes close to achieving the ACA goals. The fact is, you don’t even agree that there was a problem. Conservatives have never been serious about health insurance reform.
            Health care is a right. Health insurance is a responsibility. To fulfill the responsibility, it has to be reasonably affordable and available to everyone. To that end, the government has to regulate it. That is my position on health care, and because I know for a fact that you don’t agree that health care is a right, we will never agree on the best policy options.

  2. South of Davis

    The pension cuts have already started and they will (slowly) continue to try and hide the fact that CalPERS is nothing but a Ponzi scheme that will crash without growth (that we can get by letting millions of illegal workers in to the state).

    The LA Times wrote (in 2011):

    “CalPERS has also dramatically cut the pensions of top officials in Bell after an audit determined that they were improperly inflated, according to records obtained by The Times under the California Public Records Act.
    Former City Administrator Robert Rizzo is now set to receive $50,000 per year. Before, he had been poised to get $650,000 a year from CalPERS and more than $1 million annually overall when a second pension from the city was included. The pension of his assistant, Angela Spaccia, was slashed from a projected $250,000 to $43,000. The aggressive review comes amid criticism of high pensions paid to some officials, even those accused of wrongdoing.”

    http://articles.latimes.com/2011/aug/09/local/la-me-pension-rollbacks-20110809

    Like David I am “sympathetic to defined benefits” but sadly the goal of the (mostly older) guys running the system is to “get theirs” and hide the problems as long as possible as they make as much as possible knowing the money is not there (They are not working hard to “hide” things since even when the “official” CalPERS reports say they only have about half the funds they need almost no one seems to care)…

    1. Frankly

      The idea of defined benefit pensions died 25 years ago. It died because of the problem of risk-shifting. As we discovered with the Great Recession, there is a risk catastrophic loss in returns. Certainly that risk is why many people support defined benefit pensions, but it is the scope and scale of the commitment to beneficiaries now pits those without defined benefit pensions against those that do.

      Then there is the problem with job-locks… the circumstance where just-waiting-for-retirement, burned-out, uninspired, unmotivated and grumpy public sector employees bring down the work culture and establish general performance mediocrity.

      Defined benefit pensions are a thing of the past. We need to convert all retirement plans to defined contribution plans. Employees need to own the balance on their retirement accounts and be able to leave a job that is not a good fit or when they get burned out doing the same thing.

      1. Tia Will

        Frankly

        “Defined benefit pensions are a thing of the past. We need to convert all retirement plans to defined contribution plans”

        This does not need to be an either or situation. Kaiser has what is essentially a hybrid with a portion of ones retirement as “defined benefit” and a portion as “defined contribution” which provides a “safety net” as well as an incentive to save.

        “Employees need to own the balance on their retirement accounts and be able to leave a job that is not a good fit or when they get burned out doing the same thing.”

        I agree wholeheartedly with the last part of your statement that employees need to be able to leave a job that is not a good fit …..”. But pensions are only part of the problem with lack of job mobility. I find it inconsistent that you state that there were “only two problems with our health care system ” prior to Obamacare. A third huge problem, which we still have is that affordable insurance is still pegged, although not as closely, to employment. Anyone that cannot see that linking health insurance to employment, especially at a time of high unemployment is materially harmful not only to the individual, but to all taxpayers who are left paying for the most expensive care possible ( emergency) instead of focusing on the most cost effective care ( preventative) is either not considering the increased cost to the taxpayer or is willfully ignoring it.

        1. Frankly

          I don’t have a problem disconnecting health care insurance as a job benefit and just making health insurance a consumer product like auto insurance, but it just means that people would have to be responsible for not buying a new car with their extra compensation instead of buying insurance. And if they did buy a new car instead of insurance, then allowing them to suffer the pain of having to pay more for their insurance over pre-existing conditions.

          One way we can motivate people to buy health insurance independently is to provide them a tax credit for equal to their tax liability for the extra income that employers would pay in lieu of health care benefits.

          There is one justified reason for employers providing health care benefits to their employees though. For example, I provide them and also a wellness benefit. This comes down to a business perspective of protecting my valuable business assets… the people that work for the company.

          But what about all those people that don’t work?

          The political left needs to look in the mirror for their policy demands and political discourse and be honest about how that has led, and is leading to, a drop in economic growth. And that drop in economic growth means more people out of work and then more people that cannot afford healthcare.

          Economic activity is required to generate the money to pay for health care costs in any scenario you want to throw out there. If government policy is causing less economic activity that could otherwise be developed and grown, the government is contributing to the problems of limited health care access.

          1. Don Shor

            And if they did buy a new car instead of insurance, then allowing them to suffer the pain of having to pay more for their insurance over pre-existing conditions.

            Pre-existing conditions should not even be a factor in the pricing of insurance policies. We have no control over the existence, nature, and cost of our pre-existing conditions. They just happen. If consumers want to pay more for better coverage or lower out-of-pocket, that’s our prerogative. And that option exists right now under the ACA.

          2. Frankly

            Pre-existing conditions are only a factor when people choose not to purchase insurance. Basically taking risks. Sorry Don, you cannot take personable responsibility out of the equation and come up with a system that works.

            I agree that no insurer should be able to refuse or cancel a policy due to health conditions.

            And I agree that no insurer should be able to charge a premium for people with contiguous coverage that have pre-existing conditions.

            But all insurers should be able to charge a premium to customers that have a lapse in coverage if those customers have pre-existing conditions.

            Except for when they can prove financial hardship that caused them to not be able to afford health insurance.

            This would have been a reasonable approach that kept health insurance as a reasonably-regulated free market product instead of a government bureaucracy nightmare that cannot even get a website to work in three years and hundreds of billions of tax payer dollars.

            In the model I outline Don, you would have been covered and Obamacare would not have been necessary. You know this, but I doubt you will admit it because your track record is to defend Obamacare to the bloody end.

          3. Don Shor

            And I agree that no insurer should be able to charge a premium for people with contiguous coverage that have pre-existing conditions.

            But all insurers should be able to charge a premium to customers that have a lapse in coverage if those customers have pre-existing conditions.

            You completely fail to understand what insurance companies were doing. Refusing insurance. Cancelling policies. Pricing them so high they were literally ridiculous. Refusing to cover the pre-existing conditions (which made the insurance useless). Every one of my lapses in coverage was caused either by the insurance company or by my inability to find an affordable or effective option. This ‘lapse in coverage’ nonsense that Republicans keep harping on would apply to nearly everyone who had pre-existing conditions. WE didn’t choose to get them. Pre-existing conditions are not always, or even usually, related to choices that we make.
            To whom were we going to have to “prove” our “financial hardship?” The government? The insurance company?
            I will defend Obamacare to the bloody end because no Republican plan ever would have achieved the extension of coverage that the ACA does, and no Republican proposal would have covered the situation that those of us with pre-existing conditions found ourselves in. It was a crisis. The ACA solves that crisis.
            The ACA works. Nothing any Republican or conservative has ever proposed comes close to achieving the ACA goals. The fact is, you don’t even agree that there was a problem. Conservatives have never been serious about health insurance reform.
            Health care is a right. Health insurance is a responsibility. To fulfill the responsibility, it has to be reasonably affordable and available to everyone. To that end, the government has to regulate it. That is my position on health care, and because I know for a fact that you don’t agree that health care is a right, we will never agree on the best policy options.

  3. Davis Progressive

    sod’s post really has nothing to do with the issue at hand. the issue here is if the employees are promised 2.5% at 55 from 2011-2014, when the city can’t roll it back for 2015 on, to 2% at 60. on the other hand, why is it perfectly find for a city to increase the pension to 3% at 50 in 2014 and have it apply backwards in time creating an instant unfunded liability.

  4. Davis Progressive

    sod’s post really has nothing to do with the issue at hand. the issue here is if the employees are promised 2.5% at 55 from 2011-2014, when the city can’t roll it back for 2015 on, to 2% at 60. on the other hand, why is it perfectly find for a city to increase the pension to 3% at 50 in 2014 and have it apply backwards in time creating an instant unfunded liability.

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