Calif. Employee Pensions Are Not Sacred Cows, Judge Rules. But Don’t Call the Slaughterhouse Just Yet.

Public sector unions in
California have used their enormous clout to protect their plum
pensions, making it nearly impossible for municipal governments to
scale back benefits in any way shape or form (even for employees
they hadn’t even hired yet). Even as California cities file for
bankruptcy, unable to pay off various debtors, the California
Public Employees’ Retirement System (CalPERS) has argued that debts
owed to them are special and off the table. They cannot be reduced
or severed, even in the case of bankruptcy.

And then yesterday U.S. Bankruptcy Judge Christopher Klein’s
told CalPERS
it was wrong. In the case of a bankrupt city, pensions can be
cut just like any other debt. That’s what the bankruptcy process is
for. As The Sacramento Bee explains, the ruling came
because a debtor in the bankruptcy of the city of Stockton,
Franklin Templeton Investments, is upset that it’s only going to
get a ninth of what it’s due and wants a better deal, and that
might come from money going to pensions.

It’s important to note that this ruling doesn’t require Stockton
to cut pensions. Their current bankruptcy reorganization plan
maintains the status quo there, to the tune of $29 million a year.
Klein will rule on this plan at the end of the month. Certainly,
though, Klein’s ruling should be seen as a warning to Stockton that
he might not allow the city to favor some debtors over the others
to the extent that it’s doing with CalPERS.

Reason contributor Steven Greenhut has written extensively about
Stockton’s financial woes, both
here and at the San Diego Union-Tribune. He looked
over Stockton’s plan and noted that a failure to rein in pension
costs as part of its recovery could put the city back into
insolvency within four years. Read more
here.