Dan Walters

July 22, 2013

Dan Walters: Bankruptcy zeroes in on pensions

The state constitutions of Michigan and California have almost identical provisions prohibiting what lawyers call "impairment of contract."

The state constitutions of Michigan and California have almost identical provisions prohibiting what lawyers call "impairment of contract."

Michigan: "No bill of attainder, ex post facto law or law impairing the obligation of contract shall be enacted."

California: "A bill of attainder, ex post facto law, or law impairing the obligation of contracts may not be passed."

Their impact, if any, on public employee pensions is a big issue in two pending municipal bankruptcies in California and Detroit's decision last week to seek relief for its debts, including pension obligations, via bankruptcy.

Detroit's bankruptcy petition, unlike those of Stockton and San Bernardino in California, directly seeks to reduce pensions.

But its pension systems have filed suit, claiming that it violates Michigan's "impairment of contract" prohibition and a more specific provision declaring that public pensions are "a contractual obligation thereof which shall not be diminished or impaired thereby."

Stockton sought no pension changes in its bankruptcy, which was the nation's largest city to declare insolvency until Detroit came along.

However, the insurers of millions of dollars in city bonds have urged the bankruptcy court to treat Stockton's pension obligations as debts that can be reduced just like other debts.

The California Public Employees' Retirement System and the city have fought the insurers point by point, and unless a deal emerges from current settlement talks, the pension status issue will be joined later this year.

San Bernardino's case is more or less the polar opposite. CalPERS is opposing its bankruptcy because the city wants some still-unspecified relief from its pension obligations and, in fact, has stopped making payments to CalPERS.

CalPERS originally relied on the "impairment of contract" provision in waging its legal battle, but Stockton's bankruptcy judge, Christopher Klein, has indicated that it would not be an effective barrier.

At one point, he ruled that contractual health care promises to retirees could be reduced because federal bankruptcy law carries more weight than state law, startling CalPERS lawyers.

"I've been party to impairment of millions of contracts and it's all constitutional," Klein declared during one proceeding.

Since then, CalPERS has altered its strategy, arguing that pension obligations can be shielded from bankruptcy because federal law must respect state laws, a states' rights argument that, interestingly enough, also is being adopted by Gov. Jerry Brown in his battle with federal judges over prison overcrowding.

With pensions as a central issue in all three municipal bankruptcies in three different federal courts, the issue is uncharted legal territory and likely headed to the U.S. Supreme Court.

Call The Bee's Dan Walters, (916) 321-1195. Back columns, www.sacbee.com/walters. Follow him on Twitter @WaltersBee.

Editor's Note: This column has been updated from print and online versions to clarify that Stockton was the second largest city to declare bankruptcy until Detroit did so. Updated July 22, 2013 at 1:16 p.m.

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