A decision by a U.S. Bankruptcy judge in the Stockton bankruptcy case does not mean the issue of public pensions’ burden on local government finances can be ignored. While the bondholders attempt to bring pension reductions into the bankruptcy talks failed because the judge said the bondholders acted in bad faith, the pension issue will remain a focus of the bankruptcy solution moving forward.
Stockton officials made many mistakes in leading their city to the financial brink, which the judge listed in his decision. However, the biggest burden on the bankrupt city is its on-going pension obligation, which stands at nearly $1 billion.
As Stockton officials use the judge’s decision to work the city’s way out of bankruptcy, the pension obligation will remain a big cloud hanging over the city’s efforts.
Can city leaders come up with a plan to satisfy the court that the city will clear bankruptcy while leaving the big pensions obligations untouched? It seems like a tall order but because of yesterday’s ruling, Stockton has an opportunity to make it work.
The results of the Stockton officials’ efforts will reverberate across the state. San Bernardino and Mammoth Lakes also face bankruptcy and the question of dealing with the shortfalls while ignoring the pension payouts will likely arise in other places.
Should Stockton eventually need to get court permission to rip up its pension contracts, other cities will consider how to deal with pension burdens before the bankruptcy wolf is at the door.
Keep an eye on the biggest fish of all – the City of Los Angeles.
In less than a decade the city’s contributions to its pension funds have increased nearly 150% and the city’s CAO projects by 2017, 25% of the city’s General Fund will go toward pensions.
Former Mayor Richard Riordan has projected bankruptcy for Los Angeles if the city doesn’t change it ways of doing things, especially with pension and benefit obligations.
Despite yesterday’s court decision in the Stockton case, pensions will remain on the table as part of the discussion for cities teetering on the financial brink.