Federal Judge: Stockton pensions can be cut in California bankruptcy

UT San Diego reports:

Public-employee pensions are not protected when a city goes belly-up, according to a ruling Wednesday by the judge overseeing Stockton’s much-watched federal bankruptcy case. Judge Christopher Klein’s few words have re-energized the state’s disheartened pension-reform movement – and left the nation’s most-powerful pension fund reeling.

One can’t go a day in Sacramento without hearing about a “historic” piece of legislation or a “groundbreaking” decision, but the Stockton case – held in a downtown Sacramento courthouse – could change everything on the pension front. Klein said in the verbal ruling that pensions are just another contract: “Impairing contractual obligations – that’s what bankruptcy is all about.”

Until now, there has been no way for California cities to get out from underneath the overly generous pension promises they have made to public employees over the past 15 years, the result in part of a pension-increasing bonanza spurred by 1999 legislation championed by the California Public Employees’ Retirement System.

CalPERS has argued successfully in many courts that municipalities cannot reduce pensions for public employees, even on a go-forward basis. That has reduced fiscally sound cities’ ability to shave costs. But CalPERS has taken that argument further by claiming cities must make their full pension payments – even when they no longer can pay their bills.

History in the making. It appears that once municipalities show up to federal bankruptcy court and have their petition accepted: a clause in a state constitution no longer applies.