The Specter of Bankruptcy Haunts California

Will state lawmakers heed the lesson of Stockton?

The most optimistic pension reformers had hoped that the decrepit city of Stockton's 2012 bankruptcy would be a "day of reckoning" — a point where the city's leaders would pare back overly generous retirement benefits and embark on a road to fiscal responsibility.

They saw hope for hard-pressed cities everywhere, as Bankruptcy Judge Christopher Klein set up a possible showdown over pension payments when he rejected efforts by bond insurers to stop the bankruptcy motion. Klein said he was leaving everything on the table, meaning that city employees might eventually join the bond guys in taking a haircut.

But as often happens with government-reform efforts, the pessimists turned out to be right. Earlier this month, the Stockton City Council approved a plan that restructures debt and fully funds the California Public Employees' Retirement System, thus leaving pension benefits for city employees unscathed.

If there's any doubt who won out, one need only read the CalPERS statement: "By continuing to fully fund its pension obligations, Stockton … acknowledged the importance of a secure retirement to its current employees and retirees, and the positive impact that pensions have on recruitment and retention of quality public servants."

It's hard to believe that such lush pensions are needed to lure "quality public servants." But whatever the case, when cities run out of money everyone should share the pain. Instead, the key "stakeholders" — city employees, union leaders, Wall Street creditors — declared a "win-win," but the deal is not without its losers: taxpayers.

The so-called Plan of Adjustment is based on the passage of Measure A, a Nov. 5 sales-tax-increase measure that is being sold to residents as a means to assure that sufficient police officers are on the street. If voters say "yes," the restructuring numbers work out. Officials elsewhere will get the message: Just raise taxes after the spending spree hits the fan.

Stockton had paid its employees 25 percent above the California public-sector average, and still offers its police and firefighters a "3 percent at 50" plan that allows them to retire at age 50 with 90 percent of their final years' pay. The city had offered lifetime medical benefits for people who worked there only a short time, causing one council member to dub it a "Lamborghini" plan. That benefit is rolled back, but there has been no reckoning.

"It's dead man walking," said Carl DeMaio, the former San Diego councilman, current congressional candidate and pension-reform activist. "You can't tax your way out of an unsustainable fiscal obligation."

Apparently, Stockton is following the footsteps of Vallejo. That San Francisco Bay Area city "is again facing a budget crisis as soaring pension costs, which were left untouched in the bankruptcy reorganization (two years ago), eat up an ever-growing share of tax revenues," according to Reuters.

In refusing to take on what Vice Mayor Stephanie Gomes called "a giant behemoth like CalPERS," Vallejo took the easy way out but never fixed its fundamental problems. Services are still subpar. And now Stockton, where residents joke about not calling police unless there is blood in the streets, is doing the same thing.

"They're not even kicking the can very far down the road," said Jack Dean, vice president of California Pension Reform, which is crafting a statewide pension-reform initiative for the November 2014 ballot. "It's like what happened in Vallejo. The [bankruptcy] judge should say, 'We'll see you back here in a few years.'"

Stockton's proposed three-quarter-cent sales-tax increase is great for creditors, who now have hope of being made whole after providing the city with pension-obligation bonds several years ago. But opponents say in the official ballot arguments that the $28 million annual tax hike will "be swallowed up by escalating employee pension costs." Opponents also complain that the profligate City Council can squander the money in myriad ways.

After Judge Klein allowed Stockton's bankruptcy to proceed in April, the bankrupt city of San Bernardino, which had halted payments to CalPERS, started its payments again. Officials there no doubt figured that it's too tough to take on the nation's largest pension fund, which has threatened legal battles if pensions aren't at the top of the payment heap.

Other California cities, struggling with pension costs but still far from hitting the bankruptcy wall, are left to reckon with an increasingly intractable problem.