PD Editorial: Avoiding the nuclear option on pensions

A federal judge handed California cities a powerful new tool to regain control of employee retirement costs: cutting pensions through a bankruptcy filing.

Call it the nuclear option.

The Cold War label fits because there’s a doomsday element to unleashing this weapon.

Cities can decisively address a threat to their solvency, but bankruptcy damages a city’s reputation, subjects elected officials to questions about their competence and, more important, requires them to relinquish control of their finances.

Public employees currently have the upper hand on pensions, and it’s not unreasonable for them to assume that cities will be reluctant to declare bankruptcy. However, if the unions are wrong, payments to their retired members could be cut (along with promised benefits for active members).

In the case of Stockton, a lawyer for the city said employee retirement benefits could be reduced by 60 percent if the California Public Employees Retirement System were treated as an ordinary creditor. On Oct. 1, U.S. Bankruptcy Judge Christopher Klein ruled that CalPERS is entitled to no special protections.

Klein is due to rule later this month on Stockton’s reorganization plan, which would leave CalPERS whole while paying some other creditors pennies on every dollar owed. Even if he accepts the city’s plan, his ruling matches a bankruptcy judge’s finding in Detroit.

No one wins if retired workers lose some or all of their pension benefits in a bankruptcy cram down.

But citizens already are losing out on routine services as streetlights are turned off and roads go unrepaired because of the spiraling costs of employee retirement benefits.

California has taken some steps to control those costs, with many cities negotiating a second, lower tier. A state law enacted in 2013 established new caps on retirement formulas, effectively creating a third tier for many agencies. In each case, however, the lesser benefits apply only to new employees.

For people hired before 2013, enhanced benefits are worth up to 80 or 90 percent of salary, beginning as young as 50 or 55 years old. Many of these employees are contributing more toward their pensions, but taxpayer costs are still climbing due to huge unfunded liabilities, the high cost of those generous benefits and CalPERS’ steep investment losses during the Great Recession.

Until now, those benefits have been treated as inviolable.

The courts have interpreted California’s constitution to prohibit any reduction in accrual formulas for public employee pensions. Unions declared war on an initiative that would subject future benefits to collective bargaining, and that measure is tied up in court.

Klein’s ruling puts not only present and future benefits in play, it opens the door to cutting payments to existing retirees.

Let that be an incentive for all sides to seek an agreement on a new system that would safeguard benefits that already have been earned by present and former employees while allowing for reductions going forward. The money that’s saved would be available for public services and other present expenses, including salaries and health benefits for public employees.

During the Cold War, sober-minded negotiations helped prevent a war that no one wanted and no one could win. Now is the time to bring that approach to public employee pensions.