By allowing the bankruptcy of Stockton, California, to proceed over its creditors' objections, a judge on Monday skirted the issue that must soon be addressed in the state: whether the overly generous pension benefits promised to public employees in good economic times can be reduced when cities go belly up.
"I don't know whether spiked pensions can be reeled back in," said U.S. Bankruptcy Judge Christopher Klein, according to the Associated Press.
It would be nice to get a more definitive read from the judge charged with reviewing these complex questions. Instead Klein gave the California Public Employees' Retirement System and the state's powerful public-employee unions a huge victory.
A California law makes the pension payments that cities make to the retirement systems funding those pensions sacrosanct. Pension reformers thought that federal bankruptcy law would trump state law, and that bankruptcy would therefore be a good way for cities to get out from under their crushing pension debts. But those who advocated the municipal-bankruptcy option underestimated the determination of city officials to protect pensions above virtually everything else.
When Stockton couldn't make its pension payments, it borrowed money via pension-obligation bonds. Now when the city's overspending and misshapen priorities -- providing the most-generous pension formulas in the state, granting employees what one councilmember referred to as a lifetime "Lamborghini" health plan, paying many cops more than $200,000 a year in compensation -- have caught up with it again, it has chosen to protect most of the big spending and stiff the creditors who provided the pension bonds.
Maybe it's hard to feel sorry for creditors who would provide the poorly run industrial city with pension-obligation bonds, but this decision is bad news. The cost of municipal borrowing is sure to rise statewide, even if the bond community has mostly shrugged at the developments in Stockton's bankruptcy efforts. Perhaps creditors will insist on future covenants with cities to protect themselves. The real losers, however, are taxpayers and residents of hard-pressed cities.
Stockton's creditors claimed that the city wasn't really bankrupt because it didn't try to take on Calpers, its biggest creditor and the largest U.S. public pension. City officials argued that they couldn't staff the city if they didn't offer an "industry-standard pension plan" -- a dubious claim, especially given the high regional unemployment rate. The city claims that it slashed benefits, when in fact it only reined in some compensation, leaving generous pensions intact.
Calpers has praised Stockton's bankruptcy plan even as it has protested the bankruptcy in San Bernardino. That decrepit city in Southern California hasn't been making its full payment to Calpers given its lack of funds.
Some observers say that as the Stockton bankruptcy unfolds, the question of city obligations to Calpers will be addressed. That seems unlikely. Reformers will turn their attention to San Bernardino, and to litigation over the city of San Jose's successful pension-reform initiative passed last year. Those cases have a better chance of determining whether current employees have to share in the pain when municipal overspending takes its toll, or whether Calpers and public employees remain a protected class.
(Steven Greenhut, a contributor to Bloomberg View based in Sacramento, California, is vice president of journalism of the Franklin Center for Government and Public Integrity. The opinions expressed are his own.)
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.