The most serious and high-profile municipal bankruptcy of 2013 was Detroit’s. The city’s financial crisis has had many ramifications, including how the city will — or even can — handle its pension obligations. Does Detroit’s experience point the way for other cities that face similar financial and pension-related challenges?
Harvey L. Leiderman, CalPERS’ general, fiduciary, litigation and investment counsel, doesn’t think so — at least not for California cities on the financial brink.
In the Motor City’s heyday 50 years ago, Leiderman notes, Michigan amended its constitution so state employees would have contractual rights to their pensions — a seemingly benign step that has had unintended consequences and has imperiled the benefits it was intended to protect.
Leiderman observes that in his Dec. 3 ruling, bankruptcy court judge Steven W. Rhodes said that Michigan could have guaranteed pension benefits, but did not do so. Leiderman argues that since the retirees only had contractual rights, it was easy for Rhodes to conclude that their pensions were in play in a federal bankruptcy proceeding.
That may exonerate Detroit from its pension obligations, but it doesn’t put bankruptcy in play for California cities, says Leiderman. This is because retired public employees in California do not have contracts for their retirement benefits. Instead, California created an independent public agency, funded by the governmental entities, that pays them their benefits. In short, state law protects pensions for public employees in California.
So public employees in the Golden State need not worry about losing their pensions in municipal bankruptcy proceeding — and California cities and federal bankruptcy courts must look elsewhere to find ways to fill the financial hole.
John Iekel is a writer/editor for ASPPA and its sister organizations, including NAPA Net.
