The real history of public pensions in bankruptcy

There appears to be a frenzy of comments lately that public retirees receive excessive pensions in the current economy and that they need to be reduced. Many in the media have taken a brief look at Detroit and decided that costly pensions were the cause of the city’s bankruptcy. Nothing could be farther from the truth. Detroit pays a relatively modest median pension of $19,000 a year to general government retirees and $30,000 to police and fire retirees. Detroit’s pension system was funded at 82 percent in 2011 (and at 99 percent for its police and fire retirement system). That is higher than the national median of 74 percent. But public benefits make easy targets for critics. Let’s take a tour of pensions in bankruptcy through the years.

October 6: Muniland snaps

Attorneys Kenneth E. Noble and Kevin M. Baum describe Prichard, Alabama:

Prichard, Alabama, which experienced a population decline of approximately 50 percent over the past 50 years, filed for bankruptcy in 1999 after it was unable to pay approximately $3.9 million in delinquent bills. In addition to the unpaid bills, Prichard also admitted to not making payments to its employees’ pension funds and, even though the city had withheld taxes from employees’ paychecks, the city failed to submit such withholdings to the state and federal governments.

While in bankruptcy, the city successfully revised its budget so that it no longer operated at a deficit. However, Prichard was still unable to meet its pension obligations. In 2009, Prichard filed for bankruptcy for the second time in order to stay a pending suit brought by its pensioners after it failed to make pension payments for six months. In its chapter 9 petition, the city claimed that during the previous year it had operated a $600,000 deficit on its $10.7 million budget. Further, Prichard had failed to make a $16.5 million payment to its pension fund under its previous plan of adjustment.

Prichard, although it filed for bankruptcy in 2009, has not yet met the court’s eligibility requirements and pensions have not been paid, leaving retirees to struggle:

Central Falls, Rhode Island’s bankruptcy is described in Benefits Pro:

The saga began in August 2011, when the city of 18,000 declared bankruptcy. Myriad woes stemming from an industrial economy in decline helped cause the problem. When Central Falls declared bankruptcy, it had a debt of $21 million, an unfunded pension liability of $80 million and an annual budget of $16 million against $21 million in expenditures. Something had to give.

Under the Chapter 9 bankruptcy filing, the state-appointed overseer, Robert Flanders, slashed the pensions of Central Falls’ police and fire retirees by as much as 55 percent …

Regardless, Ogni and Cardin [retiree reps] say the cuts to pensions were rammed through with no time to study the matter or offer to negotiate. There was a single meeting during which the cuts were spelled out. It turned out to be a take-it-or-leave-it proposition.

Central Falls’ small group of retirees had no money or time to defend their pensions and lost about half of their monthly payments through the receivership and bankruptcy process.

In a very unusual case, Vallejo, California exited bankruptcy after actually paying more for pensions according to

Vallejo got court approval to exit from bankruptcy last week with a plan that includes a sharp increase in pension payments to CalPERS — the opposite of what many expected when the city declared bankruptcy in May 2008. Vallejo demonstrated that bankruptcy proceedings are not cookie cutter and that their outcomes rely on many factors.

Jefferson County, Alabama, the largest municipal bankruptcy until Detroit, actually did nothing to the city’s pensions and never even listed them as creditors. Jefferson County pensions were funded at the approximate level of the Detroit Police and Fire Retirement System.

Stockton, California was recently ruled eligible to proceed into bankruptcy, but the pension issue is complex. Stockton’s city manager and council don’t want to cut pensions after eliminating retiree health care benefits (OPEBs). City officials believe that it is vital to retain full pensions to attract top-notch public employees. Meanwhile, bond insurers appear to have convinced federal bankruptcy judge Christopher Klein that Stockton pensions should suffer haircuts if bondholders have to. Front Page Magazine jumps on the story:

Yet the real story has yet to unfold: it must still be determined whether the city’s creditors or its public employee retirement funds get paid off first.

Klein himself was unsure. ”I don’t know whether spiked pensions can be reeled back in,” he said during his ruling. “There are very complex and difficult questions of law that I can see out there on the horizon.”

The biggest part of Stockton’s debt is the $900 million it owes to the California Public Employees Retirement System (CalPERS). Since this is the first Chapter 9 bankruptcy case challenging state pension obligations, what Klein is essentially referring to is whether the 10th Amendment of the Constitution preserving states’ rights trumps federal bankruptcy law. Thus, it is likely this case will eventually end up before the U.S. Supreme Court.

In Stockton two very powerful forces are facing off: CalPERS – the state pension fiduciary – and bond insurers (the legal grinding stones of muniland).

San Bernardino, California filed for bankruptcy eligibility last year, but the city has numerous muddled issues related to its pension obligations. The city stopped making pension payments to CalPERS last year, but it resumed these payments in July. The city’s approach to its large pension liabilities is unknown.

Detroit presents the only municipal bankruptcy case, outside of Central Falls, where the bankruptcy manager has directly gone after the pension liabilities from the beginning of the proceedings. Unlike Central Falls, Detroit’s pensions are well-funded by national standards. It may also likely present state and federal legal issues if Detroit’s pensions, enshrined in the state’s constitution, are given haircuts.

The treatment of public pensions is not as straightforward as many expect it to be. The show in Detroit is just beginning. Stay tuned.