While Detroit is the most well-known city to be affected by bankruptcy, the California city of Stockton has been attempting to get out of bankruptcy as well. A California judge has made a ruling which mirrors a similar decision made by a judge in Detroit, determining that pensions can be cut in order for a city to exit bankruptcy. This would treat pension plans like any other debt incurred by a city.
Calpers Treated Like Any Other Debtor
The ruling determines that bankrupt cities in California can treat the California Public Employees’ Retirement System like any other debtor. The pension system, known as Calpers, benefits millions of people in the state. Cities and the state pay a total of $8 billion to Calpers to cover their workers’ retirements. Stockton currently owes over $15 million to Calpers.
Calpers would require that the city pay $1.6 billion to leave the system. However, filing for bankruptcy allows many contracts to be broken, including pension contracts. The judge ruled that there is nothing that should require that Stockton give its business to Calpers and the likelihood that the city would have to pay Calpers is low.
Should Stockton leave Calpers, retirees have other options for their retirement plans, including:
- Private insurance companies
- Union-affiliated pension plans
- California county-run pension plan
- Personal saving
Calpers had previously argued that bankruptcy courts could not determine pension plans and that state law determines these. They further stated that threatening pensions may also impair the regular functions of a city by causing workers to leave for cities whose pensions are not threatened.
While the judge did not rule in either way concerning pensions, it leaves the future of retirement plans up in the air. The tension between federal bankruptcy law and state protections now has a precedent, and other cities facing financial troubles may be able to reconsider their pension plans in bankruptcy claims.
