City Bankruptcies Opens Door To Public Employee Pension Reductions

(June 28)  A recent ruling by a federal bankruptcy judge hinted at the possibility that current and former public employees of financially troubled municipal or governmental entities could see their pensions reduced.
In recent years, three large California cities, including San Bernardino, have filed for bankruptcy protection in federal court. That has spurred a tenacious round of legal skirmishing between those cities and their creditors. One creditor the three cities have in common, the California Public Employees Retirement System, has been particularly insistent that it should be exempt from any payment or debt deferrals those cities are entitled to under federal bankruptcy protection.
The California Public Employees Retirement System, known by its acronym CalPERS, has now and for the foreseeable future will have an ongoing relationship with the bankrupt cities, just as it does with all other cities participating in its system, one that contractually requires that it make good on payments to individuals who retired from those cities. At the same time, the cities are contractually required to continue to pay into the retirement system.
In the case of San Bernardino, beginning in August, corresponding with the period it has been in bankruptcy, it ceased making payments to CalPERS. In the eleven months just ending, San Bernardino has accrued an unpaid bill with CalPERS totaling  more than $14.1 million. So far, CalPERS has continued to make pension payments to city of San Bernardino retirees. Just how long that will continue is an as-yet-unanswered question.
The city has vowed that as of July, it will reinitiate making its retirement fund payments. At this point it wants to renegotiate the financing plan for the money on which it is in arrears. CalPERS, concerned that showing leniency to San Bernardino would result in other financially challenged municipalities throughout the state temporarily skipping out on their financial obligations to the fund, is holding the line on a policy that it maintains is crucial to preserving the integrity of its entire pension program and will not allow San Bernardino to refinance its unpaid employee retirement contribution debt.
CalPERS has moved to sue San Bernardino, maintaining that it has priority status among the city’s multitude of vendors, suppliers and creditors, and that the courts should force the city to meet its $1.2-million-per-month obligation to the public workers’ retirement fund. So far the judge overseeing the case, Federal Magistrate Meredith Jury, has refused to grant CalPERS’s motions, ruling that requiring the city to expend its scant revenue to cover retirement costs would undercut San Bernardino’s effort to get back on its feet financially. Nevertheless, CalPERS is not prepared to accept the $14.1 million installment repayment plan the city has proposed, maintaining that under California law the withheld money, interest, penalty interest, late fees and all costs of collection are due it immediately, and that further delays will entail accruing interest and that interest will continue to accrue until the due amount is fully paid.
Unlike San Bernardino, the cities of Stockton and Vallejo, which have also declared bankruptcy, did not discontinue their CalPERS payments. But there are outgrowths of those cases which could have a resounding impact on the future financial health of cities as well as those who have retired after working for those municipalities. Vallejo and Stockton’s bankruptcy filings were challenged by creditors other than CalPERS, some of which hotly contested those cities’ ability to selectively transfer the financial burden those bankruptcies will result in to just some of those cities’ creditors.
U.S. Bankruptcy Judge Christopher Klein is overseeing the Stockton bankruptcy. In a ruling that confirmed the propriety of that bankruptcy filing, Klein  heard opposition from National Public and Assured Guaranty, bond insurers who had worked with Stockton in the past and are owed a considerable amount of money. Klein overruled  National Public and Assured Guaranty’s  challenge, but suggested that the bond insurers could seek to be made whole further down the road, upon Stockton’s exit from bankruptcy.
Klein referenced Section 904 of the bankruptcy code which prevents the courts from interfering with the political authority of the debtor municipalities. Klein granted Stockton’s request to set aside the city’s health benefit debts, suggesting that had the city requested the same authority to modify its pensions, he also would have granted the city that authority.
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, have received 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 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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