Public employee union leaders have always argued that pension obligations between state and local governments and their employees are a contract. As such, they are unbreakable. Under that theory, pension benefits are vested rights conferred when a government worker is hired.
The California State Public Employee Retirement System has consistently supported that view. Even when hard-pressed municipal governments stopped paying their other creditors, CalPERS has always insisted that cities must pay their pension obligations.
Recently, however, municipal bankruptcy proceedings in Stockton and San Bernardino have challenged pension contracts. Insurers for banks, bondholders and local vendors that supply everything from paper clips to janitorial services argue that if they have to stand in line for money they're owed by insolvent cities, so should all other creditors, including the state retirement system.
Attorneys for CalPERS are suing San Bernardino, which has stopped paying the state pension fund. Meanwhile, insurers for Stockton bondholders are suing to prevent that city from entering into bankruptcy. Even though Stockton has stopped paying its bondholders, banks and other creditors, the insurers complain, the city has not stopped payments to CalPERS, its biggest creditor.
The legal wrangling will end up in federal bankruptcy court next year. As the litigating parties and the federal bankruptcy judge sort out the mess, we should remember an idea floated by the Little Hoover Commission last year. It suggested that cities and the state freeze lavish pension benefits, allow existing workers to keep what they have earned to date but reduce the formula in future to lower, more affordable rates. The state pension system, the Legislature and public employee unions rejected that suggestion, insisting that promised pension benefits were sacrosanct. The Stockton and San Bernardino bankruptcy cases may prompt them to rethink their positions.
As the municipal bankruptcy cases wind their way through court, municipal leaders, legislators and the unions need to decide how best to serve workers as well as taxpayers. Rejecting pension rollbacks could lead to more government workers losing their jobs, and taxpayers getting fewer services.