Dan Walters: Another city bankruptcy zeros in on pensions

July 22, 2013 

>The state constitutions of Michigan and California have almost identical provisions prohibiting what lawyers call "impairment of contract."

• Michigan: "No bill of attainder, ex post facto law or law impairing the obligation of contract shall be enacted."

• California: "A bill of attainder, ex post facto law, or law impairing the obligation of contracts may not be passed."

Their effect, if any, on public employee pensions is a big issue in two pending municipal bankruptcies in California, as well as Detroit's decision to seek relief for its debts, including pension obligations, via bankruptcy.

Detroit's bankruptcy petition, unlike those of Stockton and San Bernardino, directly seeks to reduce pensions. But its pension systems have filed suit, claiming that it violates Michigan's "impairment of contract" prohibition and a more specific provision declaring that public pensions are "a contractual obligation thereof which shall not be diminished or impaired thereby."

Stockton sought no pension changes in its bankruptcy, which was the nation's largest municipal insolvency until Detroit came along, but the insurers of millions of dollars in city bonds have urged the Bankruptcy Court to treat Stockton's pension obligations as debts that can be reduced just like other debts.

The California Public Employees Retirement System and the city have fought the insurers point by point and unless a deal emerges, the pension status issue will be joined later this year.

San Bernardino's case is different. CalPERS is opposing its bankruptcy because the city wants some unspecified relief from pension obligations and, in fact, has stopped making payments to CalPERS.

CalPERS originally relied on the "impairment of contract" provision in waging its legal battle, but Stockton's bankruptcy judge, Christopher Klein, has indicated that it would not be an effective barrier.

At one point, he ruled that contractual health care promises to retirees could be reduced because federal bankruptcy law carries more weight than state law, startling CalPERS lawyers.

"I've been party to impairment of millions of contracts and it's all constitutional," Klein said.

Since then, CalPERS has altered its strategy, arguing that pension obligations can be shielded from bankruptcy because federal law must respect state laws, a states' rights argument that, interestingly enough, is being adopted by Gov. Jerry Brown in his battle with federal judges over prison crowding.

With pensions as a central issue in all three city bankruptcies in three different federal courts, the issue is uncharted legal territory and likely is headed to the U.S. Supreme Court.

Email: dwalters@sacbee.com. Writer Name Dan Walters

Merced Sun-Star is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere in the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

Commenting FAQs | Terms of Service