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Was it constitutional for Proposition 124 to replace PSPRS' permanent benefit increases with a capped 2% COLA?

In this blog I and multiple commenters have broached the subject of the suspect constitutionality of PSPRS' replacement of the old perma...

Thursday, December 13, 2012

San Bernardino vs. CalPERS: Bust-out or betrayal

The ongoing battle between the city of San Bernardino and the California Public Employees Retirement System (CalPERS) was briefly dealt with in the post "What if?," but for a more detailed explanation of what happened in San Bernardino, readers should check out this article, (From suburb to basket case: How California city traveled the road to ruin).

San Bernardino may be the current poster child for out-of-control pensions, but it may go down in history for a more important reason.  It may become the city that changes how pension debts are treated in bankruptcy (CalPERS triggers legal fight with bankrupt San Bernardino over pension debt).  If San Bernardino can have its debt to CalPERS treated similarly to other liabilities, this would become a precedent that would alter the landscape for all public pensions.  If bankrupt government entities are only required to repay some portion of their pension debt, public pensions will be left with no way to recoup those lost funds to pay current and future retirees.  Even more important is the moral hazard that other cities, counties, etc. will feel less compelled to manage their finances as judiciously if they can vacate debts to their largest and historically untouchable creditor in bankruptcy court.  If San Bernardino succeeds, who else might consider a bankruptcy to get out from under their pension debt?

On the flipside, what other choice does San Bernardino have?  They can not pay their debt to CalPERS and remain a functioning city.  The debt is so large that it seems unlikely that San Bernardino could ever repay it, and attempting to do so would turn the city into just a transfer agent of taxes to CalPERS.  CalPERS seems to have the same bureaucratic indifference towards San Bernardino's plight that a large bank does toward a down-on-his-luck homeowner in foreclosure.  If CalPERS has to bust out San Bernardino to get its money, so be it.

Most everyone can guess how this will end because the little guy usually gets it in the end.  It just depends on which little guy gets the worst of it: the taxpayer or the employees and retirees.  If CalPERS wins, San Bernardino will continue its slow death as services are cut and residents and businesses relocate as the city spends its dwindling tax revenue on debt service.  If San Bernadino wins, it becomes more interesting.  If San Bernardino has its debt reduced, does CalPERS make up the shortfall so that San Bernardino's pensions will still be paid as promised to both retirees and current workers?  Or will retirees and current workers see their pensions reduced in a manner that corresponds to the shortfall?   I would bet on the latter since CalPERS has no realistic option to obtain additional funds, and CalPERS would soon find itself insolvent as well if it had to make up every shortfall caused by a bankruptcy.  Needless to say, the taxpayer is going to suffer under either scenario, but less so under the second one.

There is no good solution to the situation in San Bernardino, and even bankruptcy experts are not sure how it will end.  The one sure thing is that some people are going to get shafted.

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