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Pensions “could be adjusted,” says bankruptcy judge

Across the country, states and cities face difficult fiscal situations, aggravated by the fact that they have over-promised and under-funded pension plans. As cities and other units of government consider bankruptcy, judges and others must ask whether those promises have a superior standing over promises made to vendors, bondholders, or citizens as a whole.

The city of Stockton, California, is in bankruptcy court, and offered Franklin Templeton Investments one cent on the dollar, while doing nothing to reduce payments owed to pensioners. Franklin filed an action with a federal bankruptcy court, and accused the city of picking and choosing winners, pleading poverty to some while making others whole.

In an opinion released this week, federal bankruptcy judge Christopher Klein said, “I’ve concluded the pension could be adjusted.” Though this is a significant statement, it’s not a formal ruling, which will come later this month. Klein also said “California public employee retirement law … is simply invalid in the face of the supremacy clause of the United States Constitution.” He went so far, in his oral presentation, to ask, “Is CalPERS [the state pension administrator] a state unto itself?”

The question in California and elsewhere is this: Should pensions receive a superior status over all other claims on city finances? There are several factors to consider, including prudence: The city has said it cannot attract and retain workers without an iron-clad guarantee. But a city also needs functioning capital markets to work, and Franklin Templeton has financed the city’s firehouses and some of its parks, as well as financed a move of its dispatch center, things from which all citizens benefit. If lenders get burned often enough, the results will not be good for the public at large, as they will require higher interest rates, or in the extreme, choose to not lend money.

As for the legal argument, “pensions,” the LA Times reminds us, “have no specific protections under the [federal bankruptcy] code, but they do often get favorable treatment during bankruptcy negotiations, both for practical reasons — they are usually a large, sometimes the biggest, creditor — and for emotional ones.” The “emotional” reasons, of course, have to do with the problem of concentrated benefits (due to pensioners) and diffused costs (to citizens as a whole). Once again, a financial problem caused by political logic may end up being “fixed” by … yet more political logic.

This is certainly a case that concerned citizens everywhere should keep an eye on.

First published by the Center of the American Experiment