SB On Cutting Edge Of Issue Relating To Bankruptcy & Reducing Pensions

(September 20) The city of San Bernardino finds itself at the forefront of a profound financial and public policy issue as a consequence of its filing for bankruptcy. Emerging as a significant question in that matter is whether public pension obligations are to be held as sacrosanct, no matter how generous or reasonable individual pensions are, or whether troubled municipalities can skip out on their commitments to continuously fund the retirement accounts of their current and past employees.
Public employees, their pension fund associations and their advocates maintain that under the law, municipalities and other governmental entities must honor their payment schedules for contributions toward pension funding, no matter the governmental entity’s state of solvency or if it is seeking bankruptcy reorganization.
The relatively few cities that have found themselves in the position of having to declare bankruptcy have shied away from testing whether, in fact, employee pension funds enjoy a specialized status vis-à-vis claiming to be first in the line of creditors to be paid by a governmental entity that is struggling financially. In California, San Bernardino is one of three cities with populations of over 100,000 which have sought bankruptcy protection. The other two, Vallejo and Stockton, have elected to continue to stay current on their pension fund obligations. San Bernardino, however, has taken the position that pension payments should not be  excluded from the list of debts it wants to reduce, and that the California Public Employee Retirement System, known as CalPERS, should accept for the time being a pendency plan that reduces the payments it will receive from the city in the same ratios that the city’s payments to its other creditors, including its bondholders and suppliers of goods and services, are being reduced until such time as the city is able to regain its financial footing.
CalPERS opposed San Bernardino’s bankruptcy petition, asserting that the pension fund system has a special status. This set up a counterpoint with the Stockton bankruptcy case, in which that city’s filing acceding to the proposition that pensions have special legal protections was challenged by bond creditors, who argued that the city’s exclusion of pension debt from its bankruptcy petition was unfair and prejudicial to the city’s other creditors and that the bankruptcy petition should for that reason be denied.
In the Stockton case, the federal bankruptcy judge hearing the matter, Christopher Klein, allowed the bankruptcy to proceed as filed, maintaining for the time being that the city’s payments to the pension fund can continue to be made in full, even as the city’s other creditors are receiving reduced payments or are being stiffed entirely.  In so doing, Klein rejected opposition to the bankruptcy from National Public and Assured Guaranty, bond insurers who had worked with Stockton in the past and are owed a considerable amount of money. Suggesting that National Public and Assured Guaranty could seek to be made whole further down the road, upon Stockton’s exit from bankruptcy, Klein simultaneously granted Stockton’s request to set aside the city’s health benefit debts, as well. And while he ratified  the plan to stay current with CalPERS, Klein indicated that had the city requested the authority to modify its pensions, he would have gone along with the request.
In San Bernardino’s case, it requested the authority to hold CalPERS in abeyance. The U.S. Bankruptcy Court judge hearing the case, Meredith Jury, rejected CalPERS’ arguments that it merited special protection requiring the city to put its debt to CalPERS ahead of all others. Jury allowed the city to proceed with a pendency plan that significantly reduces its payments to all of its creditors as it seeks to restructure that debt and end its insolvency.
Unexplored at this juncture is whether a permanent drawdown of a portion of financially troubled cities’ payments to the state pension fund can be made subject to negotiations. In both the San Bernardino and Stockton cases, the judges have encouraged mediation aimed at achieving compromises. Of potential discussion in these mediations is correcting downward exorbitant pensions paid to some retired high ranking public employees who used methods of so-called “pension spiking” to enhance their pensions. In recent years, the use of these pension spiking strategies have been outlawed. Nevertheless, the well-compensated retired employees are still receiving the generous retirement payments.
In recent years, there have been several highly publicized cases of pension spiking, including examples of high ranking public employees who, while employed earned salaries in the $200,000 per year range but by adding on vacation pay, leave pay and other forms of compensation on top of their salaries used for their retirement calculations, are now receiving yearly pensions approaching $300,000. Though Vallejo, Stockton and San Bernardino have yet to request pension modifications, it appears that a judge of a like mind to Jury’s or Klein’s would grant reductions or even eliminations of pension enhancements.
Thus, under the principle of the “balancing of hardships,” a city in a state of financial duress beset upon by a multitude of creditors, all of which could not be fully satisfied by that city’s available financial means, would appear to have grounds to seek to reduce pensions deemed to be excessive.

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