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INTERACTIONS
Public pensions in California are supposed to be sacrosanct and untouchable. The assumption is that public pension agreements are unalterable. However, recent California municipal bankruptcies now threaten public pension contracts and perhaps could even break them. If that happens, then any struggling municipality could target public pension agreements and benefits. We are at the beginning of a serious battle between deep-pocketed players to determine who is first in line for money from bankrupt cities and what cities must do to fulfill their bankruptcy plan.
The city of Stockton CA filed bankruptcy recently. The city wants to reduce payments to bond holders but still pay the California Public Retirement System its full amount of $29 million a year. The companies that insure the bonds are screaming foul. They say Stockton’s bankruptcy plan is inadequate because it does not address pension liability and that the city needs to reduce payments to CalPERS too. If the bankruptcy judge agrees, then this would reduce pension benefits to retirees.
This has never happened before in California. Public pensions are supposed to be protected by the state constitution, which says that laws cannot impair contracts. However Christopher Klein, the Stockton bankruptcy judge, ruled previously in a related matter that federal bankruptcy laws overrules the California constitution.
CalPERS says they come first, before bondholders and bond insurers. “It is surprising that sophisticated Wall Street firms, which are in the business of underwriting and insuring municipal bonds, were not aware of the priority rights of CalPERS and its members when they evaluated the ability of Stockton to repay hundreds of millions of dollars in bond debt.”
The bond insurers counter that Stockton “never asked for a single dollar in reduction of its liability to CalPERS” and “rather than face the hard realities imposed by its unbearable liability to CalPERS, the city takes a pass.” The insurers could lose tens of millions and will fight hard to force Stockton to lower pension payments.
No one know what happens if public pensions are reduced. Unlike with private pensions, there is no federal insurance. [Public pensions] “don’t have the same kind of safety net. We don’t know what happens … if the employer begins to monkey with the pensions,” says a pension expert. However, no one thought that public pension contracts could ever be broken just as no one gave much thought to the possibility of cities going bankrupt.
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3 comments
There is a VERY GOOD option (c) that I forgtot to mention in my above comment (and due to the "legal" environment in California, it may be the quickest road to financial reform), that being the OUTSOURCING of 90+% of all Public Sector workers.
OUTSOURCING ends the "employment relationship", and with it ALL future growth in Pensions and Benefits.
The Taxpayer paid-for share of Califirnia's Public Sector pensions are (as a DIRECT result of the collusion between the Unions and our elected representatives .... that being the trading of campaign contributions & election support for favorable votes on pay, pensions, and benefits) ROTINELY 2, 4, (even 6 times for safety workers) greater in value at retirement than those of similarly situated Private Sector workers retiring at the SAME age, with the SAME salary, and with the SAME years of service.
And these GROSSLY EXCESSIVE pensions exist while (per the US Gov't BLS) Public Sector workers (even after adjusting for education levels) earn no less in cash pay than thier Private Sector counterparts.
The offshoot, is FAR FAR greater "Total Compensation" (cash pay plus pensons plus benefits) that is both unjust to Taxpayers, and unnecessary to attract and retain a qualified workforce.
Taxpayers ...... we have yet to see ANY proposal that even remotely attmepts to eliminate this unnecessary and budget-busting excess.
In the Private Sector, it is both legal and routine for firms in financial distress to reduce the rate of pension accrual for future service for CURRENT (yes CURRENT) workers. We DESPARATELY need to stop digging the financial hole we are in even deeper, and that NECESSITATES that we either:
(a) hard freeze current Public Sector Defined Benefit Pension Plans and replace them for future service with a Defined Contribution (401K-style) PLan with a "modest" taxpayer match similart to what Private Sector workers get from their employers .... 2-4% of pay, or
(b) Keep the current Defined Benefit Plans, but very significantly reduced (by 50% for misc workers, and even more for safety workers) the pension accrual rate for CURRENT workers.
NOTHING else will even get close to addressing the financial mess we are in.
And .... think the above proposal is Draconian? Well, it ONLY stops digging the hole deeper, but doesn't address the HUGE unfunded liability for PAST service accruals.
The Unfunded liability for PAST service acruals must be addressed in the context of the State/City/Town's financial stuation, and in many will necessitate a reduction in the already accrued pensions promised to current "actives" as well as payout reductions to those already retired. As we address this, keep in mind just how excessive (and unfair to Taxpayers) these pension are .... and granted only as a result of that collusive arrangement discussed above.
Greed HAS consequences.
