Bankruptcy Will Test Pension Promise

Stockton, CA is similar to Pittsburgh, PA in terms of population (2010 Census showed the former with 291k, the latter with 305k) and land area (61 square miles and 55 square miles) but while Pittsburgh waits to see if its nearly decade long existence under Act 47 recovery status and oversight will be lightened by at least one Stockton has been given permission to declare bankruptcy. When Act 47 was on the horizon for the Steel City in 2003, many observers felt that the City was indeed entering bankruptcy (see footnotes on page 3 of our 2009 report on municipal bankruptcy) but the reason municipal distress and oversight were put into place was to stave off a Chapter 9 filing.

But Stockton has entered, following a filing by Vallejo in 2009 and one newspaper report on the filing notes "At issue will be whether U.S. bankruptcy law trumps California law, which says the pension plan must be funded". It is interesting to note that a memorandum on the Vallejo filing stated that once in a bankruptcy court-since the municipality cannot be forced there, and the state is free to place as many hoops for the municipality to jump through, even outright prohibiting a filing-"presumably, state constitutional provisions [on the abrogating of contracts, such as pensions for current employees] would yield".

Note that the article points out the City of Stockton has done a considerable amount of action: cutting employees, stopping bond payments, cut employee benefits (presumably other than pensions) and enacted an emergency spending plan but it keeps depositing money into the state pension system. It is almost the reverse situation of a Pennsylvania municipality that enters Act 47 and then drags its feet on agreeing to a recovery plan: the state will withhold money, but not if it is for pensions (natural disasters and redevelopment projects already underway also qualify).

But it makes the point that we made nearly three years ago to the day that asked what municipalities are to do if they can’t get out from under bad pension promises: cut services and tax themselves out of existence in order to pay pensions? Is that not what appears to be happening in Stockton?