Federal judge: Pensions not as protected as you think

Contrary to popular belief, government-worker pensions are not untouchable, at least according to the federal courts.

The federal judge in charge of the bankruptcy proceedings of Stockton, California, has ruled that city-worker pension debt must be treated like any other form of debt and could be adjusted under federal bankruptcy law.

The ruling is a confirmation of what the judge hinted at months ago: a city in federal bankruptcy trumps the pension protection clause in California’s state constitution.

From the Associated Press:

“In making his ruling Wednesday, [U.S. bankruptcy judge Christopher] Klein said, ‘California public employee retirement law … is simply invalid in the face of the supremacy clause of the United States Constitution.’ That means federal bankruptcy and contract law applies to the pension fund, “just like anybody else.”

If the ruling is not overturned on appeal, Stockton’s bankruptcy will be the second major example of federal courts deciding that state-level constitutional protections of pension benefits don’t apply to federal bankruptcy cases.

The federal judge presiding over the city of Detroit’s bankruptcy was the first to come to that conclusion regarding Michigan’s constitutional pension protections back in December 2013.

The Stockton ruling could have broad implications for pension systems across the country, including those in Illinois.

The state rules that govern a city’s ability to declare federal bankruptcy are different in this state. But without real pension reform, municipalities in Illinois may see bankruptcy as an appealing way to resolve their fiscal crises.

Even Chicago could eventually see bankruptcy – and the drastic pension cuts that could come with it – as a way out of its fiscal mess. Today, the city’s pension systems collectively have only 32 cents of every dollar needed to pay out future benefits.

But Chicago and other Illinois municipalities can hopefully avoid such drastic measures if the state enacts real pension reform. Such reform includes moving government employees onto 401(k)-style plans going forward.

Benjamin VanMetre is Senior Budget and Tax Policy Analyst for the Illinois Policy Institute.