Pensions Aren't Sacred, a Judge Tells Calpers

The nation’s largest pension fund just got some bad news. Almost 70 percent of Calpers’s 1.7 million members work for city and local school agencies in California, and a new ruling in U.S. bankruptcy court could put their pensions at risk.

Calpers, a state agency that manages the pensions for public workers, has long argued successfully that California law provides extra protection for public pensions when a city struggles financially, allowing Calpers to use special liens to force cities to pay up. In a ruling yesterday, U.S. Bankruptcy Judge Christopher Klein said that the state law “is simply invalid in [the] face of the U.S. Constitution.”
The ruling comes in the bankruptcy case of the City of Stockton, which confronted a financial crush after overbuilding during the housing bubble. Stockton proposed exiting bankruptcy with a deal that would leave its pension obligations intact and force other creditors to take reductions on what they’re owed. As the Sacramento Bee explained:

“City officials have said they have no choice but to stick with Calpers. If it doesn’t pay the pension fund in full, default would occur, and the city would either have to make a one-time payment of $1.6 billion to keep pensions whole or let Calpers slash benefits by 60 percent. The result would be a mass exodus of employees, the city said, creating an enormous setback just as the troubled city, saddled with poverty and a high crime rate, is starting to get back on its feet.”

Other creditors, namely the money manager Franklin Resources, have argued that Calpers doesn’t deserve special protections and that it should be subject to reductions in what it’s owed, just like other creditors. Klein’s opinion agrees in principal, meaning that when a city such as Stockton is in bankruptcy, Calpers doesn’t have special legal powers to force the city to sell its assets.

The judge stopped short of issuing a final ruling in Stockton’s case, giving the city until Oct. 30 to work out a deal with Franklin or to argue that its bankruptcy plan should still be approved. How these scenarios play out over the next month could determine just how much of a precedent Klein’s findings will create for other struggling cities. Before finalizing his ruling, Klein said,“I need to reflect more carefully.”

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