Pension Politics: California system plays hard ball in court

Another fiscal cliff is coming. Regardless of whether we go over the one created by Washington, a precipice related to state pensions looms in the near term, and hints of how far we might plunge are playing out right now in federal bankruptcy court in California.

As part of its Chapter 9 filing, the nearby city of San Bernardino wants to restructure its debts. Among the entities the city hasn’t paid recently: the California Public Employees’ Retirement System. San Bernardino’s unfunded pension liabilities total more than $140 million, and the broke municipality can’t even afford its current workforce.

Calpers, however, is playing hard ball. The country’s largest public pension fund has argued in court filings that pension obligations are at the front of the line in any municipal bankruptcy, ahead of other creditors such as private-sector bondholders. And if the city can’t pay Calpers, the fund’s attorneys argue, the pension fund can use state police powers to collect its money through asset or property seizure. Calpers lawyers called the city’s filing a “sham” bankruptcy and said withholding contributions was “criminal” behavior.

Similar bullying by Calpers prompted the city of Vallejo to short private creditors rather than try to cut back its pensions. The city of Stockton also is running scared from Calpers, but that bankrupt city’s bond insurers are challenging the notion that public-sector pensions are unbreakable contracts, a notion that flies in the face of bankruptcy law.

“The real intent of this legal harassment isn’t to collect on a $7 million bill, which is a penny in Calpers’s $240 billion bucket,” A Wall Street Journal editorial noted last week. “The goal is to deter San Bernardino from modifying pension benefits in bankruptcy.”

Credit rating agencies report that states and local governments nationwide have more than $2 trillion in unfunded pension liabilities. In Nevada, depending on how you measure risk, that figure is between $10 billion and $40 billion. Elected officials everywhere, at every level, have promised far more in employee retirement benefits than taxpayers can afford. And those funds – and their unionized beneficiaries – want these promises kept at all cost.

If bankruptcy courts eventually determine that pension benefits can never be reduced, no matter the hardships to the public, investors will be unwilling to risk putting capital into government bonds. And the voting, taxpaying public, who can barely save for their own retirements, will have a hard time accepting the idea that their governments have to close every school and lay off every cop to continue paying lavish benefits to people who aren’t working.

Pension reform should be near the top of the Nevada Legislature’s 2013 agenda. This state can’t afford to pay people to stop working in their 40s after as few as 20 years of service.

Nevada needs to shift new public employees into a defined-contribution, 401(k)-style retirement plan, and impose new cost-reducing rules on some current workers, as the state of Rhode Island has. Establish a minimum age when retirees can begin collecting benefits. Eliminate the purchase of service time. Calculate benefits over a longer work horizon. Require public employees to provide a greater share of their pension contributions.

If Nevada and other states don’t act, this fiscal cliff will arrive much sooner than we would like.