Out in California, a bankruptcy judge has just dropped a public-pension bombshell.
The prevailing orthodoxy is that when a municipality goes bankrupt, pension obligations get paid first.
But US bankruptcy Judge Christopher Klein this week ruled that federal law trumps state pension protections. In other words, the pension funds have to get in line with everyone else.
The case involved the city of Stockton, which was driven into bankruptcy in large part because of its mounting pension obligations.
Unlike Detroit, which sought the right to reduce retirement benefits for current workers, Stockton, backed by the California pension system, resisted any change.
In the private sector, of course, if the money’s not there, pensions can take a haircut. That gives workers a stake in their company’s financial health.
But because city workers assume their pensions are safe no matter what, they have no real incentive to ensure the city can afford its pension promises.
Now, our state has a well-funded pension fund; states can’t go bankrupt; and New York prefers to keep its economically ailing municipalities on life-support rather than let them go bankrupt. So Judge Klein’s ruling is not likely to have any immediate impact here.
Still, in the last three years alone, a new program in Albany has essentially let cities and the state defer $3.3 billion in payments to the state pension system.
Will these fiscally strapped cities be able to cover their obligations? We don’t know. But Judge Klein’s ruling reminds us that whatever we might think the laws guarantee, if there’s no money left in the pot, all bets are off.