NCPA - National Center for Policy Analysis

Judge Rules Pensions Can Be Cut During Bankruptcy

October 8, 2014

Last week, a bankruptcy judge ruled that California's public employee pensions have no protection during bankruptcy, allowing the city of Stockton, California, to reduce pension payments if need be.

The Sacramento Bee reports that the ruling is the first to show that the California Public Employees' Retirement System, or CalPERS, is not invincible, despite advocates' claims that pension contributions are not up for debate during bankruptcy proceedings. Two thousand California agencies use CalPERS. Before the ruling, it had been understood in California that public pensions could not be touched, even in the case of financial ruin, and that only newly hired workers could be subject to benefit limits.

The judge's ruling does not mean that Stockton will reduce pension payments, merely that doing so is an option. The ruling came as a result of a challenge from the investment firm Franklin Templeton Investments. The firm is a creditor of the city of Stockton, as it previously made a $36 million loan to the city yet is only expected to get just $4 million back on its loan. It challenged the city's failure to cut pensions in order to meet its financial obligations.

Reason.com reports that leaving the CalPERS pensions alone would mean cutting all other services. According to Jack Dean, vice president of California Pension Reform, "It has never made any sense that government workers\' pensions should be in a unique protected category. In the private sector when a corporation goes bankrupt, pensioners take a cut along with all the other creditors."

Source: Dale Kasler, "Judge rules Stockton can sever CalPERS pensions; Wall Street approves," Sacramento Bee, October 1, 2014.

 

Browse more articles on Tax and Spending Issues