Public sector unions in California have used their enormous clout to protect their plum pensions, making it nearly impossible for municipal governments to scale back benefits in any way shape or form (even for employees they hadn't even hired yet). Even as California cities file for bankruptcy, unable to pay off various creditors, the California Public Employees' Retirement System (CalPERS) has argued that debts owed to them are special and off the table. They cannot be reduced or severed, even in the case of bankruptcy.
And then yesterday U.S. Bankruptcy Judge Christopher Klein's told CalPERS it was wrong. In the case of a bankrupt city, pensions can be cut just like any other debt. That's what the bankruptcy process is for. As The Sacramento Bee explains, the ruling came because a creditor in the bankruptcy of the city of Stockton, Franklin Templeton Investments, is upset that it's only going to get a ninth of what it's due and wants a better deal, and that might come from money going to pensions.
It's important to note that this ruling doesn't require Stockton to cut pensions. Their current bankruptcy reorganization plan maintains the status quo there, to the tune of $29 million a year. Klein will rule on this plan at the end of the month. Certainly, though, Klein's ruling should be seen as a warning to Stockton that he might not allow the city to favor some debtors over the others to the extent that it's doing with CalPERS.
Reason contributor Steven Greenhut has written extensively about Stockton's financial woes, both here and at the San Diego Union-Tribune. He looked over Stockton's plan and noted that a failure to rein in pension costs as part of its recovery could put the city back into insolvency within four years. Read more here.