Detroit Bankruptcy Ruling Will Have Big Impact on Struggling California Cities

by Jeremy Loudenback

The judge in Detroit’s bankruptcy case is already having a big impact on how other cities on the brink of bankruptcy deal with employee public pensions.

According to a ruling by Judge Steven Rhodes last week, Detroit’s public pensions will not protected by state laws during bankruptcy proceedings, a decision that has left many of the city’s current and former employees worried about their retirement plans. Battered by rising costs of pensions, including the price of healthcare, a waning tax base, and severe debt obligations, the city of Detroit will likely seek to stabilize its finances through pension cutbacks under Detroit Emergency Manager Kevyn Orr. While job losses are not expected in the bankruptcy process, the ruling opens the door to an uncertain future for pensions that had been seen as constitutionally guaranteed for the city’s retired firefighters, law enforcement personnel, and other city employees.

Bankruptcy, next exit
Bankruptcy, next exit

The decision is primed to have a big impact on several cities in California struggling with the specter of bankruptcy. Pension obligations continue to be cited as a major factor for soaring costs there and are challenging how cities can deliver on promised staffing and services. In San Bernardino, the Detroit ruling while the city comes in midst of an increasingly bitter battle over pension obligations with CalPERS, the state’s public pension fund. After declaring bankruptcy last year, the city ceased making payments to CalPERS, reneging on more than $17 million in CalPERS payments, and the ruling from Detroit may embolden San Bernardino and other cities in California to reevaluate the assumption that payments to CalPERS are untouchable. Meredith Jury, the judge in San Bernardino’s bankruptcy proceedings, has thus far decided for the city, but even her rulings do not go as far as the decision in Detroit. After the Detroit decision, CalPERS issued a rejoinder to other cities hoping to explore withholding pension contributions during financial struggles on it website: “Unlike Detroit, CalPERS is not a city pension plan. CalPERS is an arm of the state and was formed to carry out the state’s policy regarding public employees. The Bankruptcy Code is clear that a federal bankruptcy court may not interfere in the relationship between a state and its municipalities. The ruling in Detroit is not applicable to state public employee pension systems like CalPERS.”

In California cities such as Stockton and Vallejo, rising pension costs as part of the CalPERS are seen as unsustainable system. The two cities have recently been through the bankruptcy process, but both claim that unless wholesale changes are made to the public pension process, they may be headed to bankruptcy court again. In the case of Stockton, a recent tax hike enabled the city to reach solvency again without touching public pensions. Worried about rising crime rates, the city chose not to curtail its CalPERS payments for fear of not being able to attract qualified police officers accustomed to generous pension plans as part of most job offers in the state. However, city’s plan still leaves many officials worried about the long-term viability with most pension costs still rising.

Across the nation, public pensioners are fearful that a domino effect could lead to benefits being slashed, even in states where pensions are protected by law. Coincidentally, on the same day that Detroit’s pension decision made headlines, the state of Illinois approved cost of living adjustment cutbacks for retirees in an effort to help preserve pension costs, a step several other states have taken in recent years. No doubt more difficult decisions for cities lie ahead as they attempt to curb the effect of spiraling costs. But the public pensions as an inviolable right is almost certainly over, and the odds are great that pensions could see greater modifications in the near future.