Stockton, California is bankrupt (in reality, if not yet in legality). Let’s see what’s involved:
When the city manager of troubled Stockton, Calif., had to tell city council members why it was on track to become the biggest American city yet to go bankrupt, it took hours to get through the list.
There was the free health care for retirees, the unpaid parking tickets, the revenue bonds without enough revenue to pay them. On it went, a grim drumbeat of practically every fiscal malady imaginable, except an obvious one: municipal pensions. Stockton is spending some $30 million a year to pay for them, but it has less than 70 cents set aside for every dollar of benefits its workers expect.
Well, if pensions aren’t a problem, I’m sure that $30 million a year (soon set to increase due to the decrease in the discount rate assumption…but I’ll leave that for another time) is a relatively small portion of the budget.
2011-2012 Budget (page 321, Internal Service Funds)
Pension Contribution: $32M
That’s about 25% of the internal service budget. 25% of the budget on pension contributions (and we’re not even talking about debt service to the pension obligation bonds they have, which is about $7M/year) — and that’s not a key factor in the bankruptcy?
For comparison, take a look on page 330 of the document, and you’ll see healthcare expenditures in total has been running about $40M. That’s for active, as well as retired employees. If retiree healthcare is such a big issue, I’m thinking pensions are as well.
Yeah, I know that Calpers don’t want the legal rights to the pensions tested. They make a good try to pull in federal contract law:
Second, even if a proposed amendment eliminated the State Constitution’s Contract Clause in its entirety, the Contract Clause in the United States Constitution would give rise to the same protection of vested pension rights as the State Constitution. Most of the published California cases that have analyzed the constitutionality of modifying vested pension rights of public employees have not meaningfully distinguished between the Contract Clause in the California Constitution and the Contract Clause in the United States Constitution. In 1991, the California Supreme Court removed any doubt that the United States Constitution protects public employee pension rights in California to the same extent as the California Constitution, by explaining that prior case law had “never rejected the federal clause as a source of protection” and “in light of prior California decisions consistently extending federal contract clause protection to state public officers, it is simply ‘too late’ to retreat from the clear implication of those holdings.”
Let’s see what kinds of things that have been deemed vested rights of California public workers:
In general, CalPERS members have vested rights to:
»»Have their service retirement allowance determined based on the benefit formula that existed in the law when they provided service, if they satisfy all eligibility requirements.
»»Have their retirement allowance based upon all service credit that they accrued by providing service or by purchasing service credit.
»»Have their retirement allowance calculated using the definition of “final compensation” that existed in the law when they provided service.
»»Have their “final compensation” determined according to the definition of “compensation earnable” that existed in the law when they provided service.
»»Receive a disability allowance or an industrial disability allowance determined in accordance with the law that existed when they provided service, if the member satisfies all eligibility requirements.
»»Purchase service credit under the terms that existed in the law when they provided service, if the member satisfies all eligibility requirements.
»»Receive cost of living adjustments to their retirement allowance under the terms that existed in the law when they provided service. This includes “Purchasing Power Protection.”
»»Have their beneficiaries receive death and survivor benefits provided under the terms that existed in the law when the member provided service.
»»Receive the benefits of reciprocity that existed in the law when they provided service, if they satisfy all eligibility requirements.
»»Withdraw their contributions, plus accrued interest, upon separation from employment, when eligible for such a withdrawal.
»»Have an actuarially sound retirement fund, which requires (a) that the CalPERS Board establish employer contribution rates sufficient to maintain the actuarial soundness of the system so that the competency of its assets is assured, and (b) that the employers timely pay those rates.
That last one is interesting, given that it sounds like the pension is only 70% funded. As per my prior post, in annuities, not only do the promises have to be 100% funded (at much more conservative valuation assumptions), the insurance company has to hold capital above and beyond that to be considered sound. Regulators will seize insurers if the capital levels drop too low.
In any case, back to the NYT article:
Some public pension experts think they know why pensions were not on the city manager’s list. They see the hidden hand of California’s giant state pension system, known as Calpers, which administers hundreds of billions of dollars in retirement obligations for municipalities across the state.
Calpers does not want cities like Stockton going back on their promises, and it argues that the state Constitution bars any reduction in pensions — and not just for people who have already retired. State law also forbids cuts in the pensions that today’s public workers expect to earn in the future, Calpers says, even in cases of severe fiscal distress. Workers at companies have no comparable protection.
Stockton is in the midst of a mediation process with its creditors that will determine by the end of June whether it will file for Chapter 9 bankruptcy, which would allow the city to negotiate reductions in its debt in court.
For Calpers, the prospect of a California city in Federal Bankruptcy Court portends a potential test of the constitutional mandate that federal law trumps state laws — in particular, the state laws that protect public workers’ pensions in California. Such a challenge could blow a hole in what experts consider the most airtight pension protections anywhere.
“Obviously, what Calpers wants is that it doesn’t come up in the process, which I think is ridiculous,” said David A. Skeel Jr., a law professor at the University of Pennsylvania who writes frequently on bankruptcy. “My view is that even the California Constitution is subsidiary to federal bankruptcy law.”
You know when contracts get broken, legally? In an official, legal bankruptcy process.
I’m no constitutional scholar, not even in pretend, so I will leave the finer points of where pensions fall in the heirarchy of creditors.
I will point out, though, that ultimately written law becomes irrelevant. Later in the article, we are reminded of the case of Prichard, Alabama (about which I’ve written several times):
Prichard, Ala., tried to file for Chapter 9 bankruptcy in 2009, after its pension fund ran out of money, but its case was thrown out by the judge, who cited a rule that Alabama cities must have bonds outstanding to qualify for Chapter 9. Prichard had no bonds at the time, just a big debt to its retirees. The city went for nearly two years without paying them their pensions, then reached an out-of-court settlement that gave them about one-third, on average, of what they had earned.
There is no getting away from the law of numbers. Prichard did not “legally” go bankrupt. What it did do is go bankrupt in reality.
Calpers may keep trying to flex its muscle in preventing municipalities, even in bankruptcy, from leaving the system, but just like with Greece, a patched-over bankruptcy where pensions and other retiree benefits inexorably increase means that the real bankruptcy will come later and harder.
By taking a hard line here, not allowing pensions to be altered, even for those only one year into a career, may actually be making the pensions less safe.
When the law is out-of-line with reality, reality always wins.