By Cyril Tuohy
Within hours of a U.S. bankruptcy judge clearing the way for cuts to current and future pension benefits to rid a bankrupt Detroit of its $18 billion liability, the Illinois General Assembly on approved an overhaul of the government worker pension system to remove a $100 billion pension debt in that state.
An even bolder pension reform initiative is just around the corner. In California, mayors in several powerful communities are backing an amendment to the state constitution that would give taxpayers the power to reject what they see as unsustainable fiscal promises made to public-sector unions.
If proponents of the measure can gather the required 807,615 signatures, the initiative would be put before voters on the November 2014 ballot.
“All across the state services are being crowded out,” San Jose Mayor Chuck R. Reed, said in a speech addressing members of a conservative think tank. “Infrastructure is not being paid for. Roads are deteriorating. Libraries, community centers, public safety are all suffering due to skyrocketing pension costs.”
Supporters joining Reed, a Democrat, include Ocean Grove Mayor Bill Kampe, San Bernardino Mayor Pat Morris, Santa Ana Mayor Miguel Pulido and Anaheim Mayor Tom Tait. All are Democrats except for Tait, a Republican.
The constitutional pension reform initiative, however, does not have broader support from powerful California Democratic leaders. Opponents of the measure say the money backing the Reed initiative is coming from powerful, out-of-state right-wing interests.
“Reed won’t say where he’ll get his money from,” writes Steve Maviglio, a political consultant and spokesman for the union-backed Californians for Retirement Security. “But the fingerprints of right-wing and Wall Street money already have stained the measure.”
Amending pension promises of nearly 3 million California public employees is risking all-out war with public sector unions, he also writes.
The Reed initiative would allow a state government employer – the Los Angeles Unified School District, for example – to reduce pension accrual rates and cost of living adjustments, raise the retirement age for payment of pension and benefits, and require employees to pay a larger share of their health care and pension costs.
Unions respond that “pension reform” is a false alarm, drummed up by right-wing politics to further weaken public employees.
California pension plans are under control of the multibillion-dollar pension fund known as California Pension Employees’ Retirement System (CalPERS), which has done a fair job of keeping funded ratios within acceptable margins.
Morningstar data show the funded ratio of California state pension plans last year amounting to 76 percent. Funded ratios above 80 percent are considered good, while ratios above 70 percent are considered fair.
But with a total unfunded liability of $131.4 billion last year, the Golden State had a per capita unfunded liability of $3,587 for every California resident, according to Morningstar’s “The State of State Pension Plans 2013.”
By contrast, Illinois had a funded ratio of only 40.4 percent, and an unfunded liability of as much as $94.5 billion. Its per capita unfunded liability last year came to $7,429 per Illinois resident, according to Morningstar’s figures.
The 2014 California ballot initiative sponsored by Reed comes on the heels of three cities winning Chapter 9 bankruptcy protection: San Bernardino, Vallejo and Stockton. (A fourth municipality, the resort of Mammoth Lakes, settled a $43 million real estate development lawsuit that forced it to seek protection from creditors.)
In each case, creditors are doing battle with current and future municipal retirees who are fighting for benefits they were promised, and pension issues fare high on the agenda in the San Bernardino and Stockton bankruptcies in particular.
San Bernardino was so broke that last year it suspended pension payments to CalPERS before resuming them again this year even as CalPERS made the case that San Bernardino didn’t qualify as a bankruptcy because city leaders ignored dire warnings for so long, according to Liz Farmer, writing on Governing.com.
Stockton’s Chapter 9 bankruptcy is under challenge by its bond insurer Assured Guaranty, which claimed the city failed to explore its options when it didn’t bother to renegotiate the pension debt with CalPERS, Farmer writes.
In the end, what was guaranteed to municipal employees in San Bernardino, Stockton and Vallejo under California law may not matter now that U.S. Bankruptcy Judge Steven Rhodes has ruled in the Detroit case that the federal bankruptcy code trumps contractual obligations guaranteed by Michigan pension laws or even the Michigan constitution.
In other words, under federal bankruptcy protection, cuts to pension benefits and all other contractual obligations are on the table. That is precisely what proponents of California’s 2014 ballot proposal say needs to be done if their state is going to keep its financial promises.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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