When I wrote about the coming "Public Pension Wars" a few years ago, the responses ranged from astounded to angry. The very idea that a state or municipality could change pension contribution requirements — in the middle of an employee's career — was shocking.
Now we're about to see the next level of state and municipal pension warfare: changes in benefits for those already retired.
The city of Stockton filed for bankruptcy, creating a new challenge to public employee pensions and health care promises. Dozens of other cities and districts have filed for bankruptcy in the past — notably Orange County, Calif., Bridgeport, Conn. and Vallejo. But not only is Stockton the largest municipal bankruptcy in terms of debt load and population, it appears to be the first one in which the court will be asked to void retiree health care and pension promises.
Cities and municipalities can file for bankruptcy under Chapter 9, which was created during the Depression, when many cities were going broke. It provides for some form of state supervision over the finances of the city or district — a humiliating process. In fact, the city of Detroit is currently caught up in that process and subject to a state-appointed financial advisory board.
In Stockton's Chapter 9 bankruptcy filing (after a 90-day state mandated mediation), the city said it will eliminate its contribution to retiree health care, along with suspending interest payments to bondholders and making cuts in union contracts. It can do that as part of the bankruptcy process. But after the filing, the retirees become general creditors, along with bondholders and others. It appears that Stockton will be the first municipality to ask the court to adjust retirees' pension payments.
When corporations go bankrupt, pension plans become a creditor. Just think back to the United Airlines bankruptcy filing in 2002 — or the bankruptcies of almost every major airline. Or remember other headline corporate bankruptcies, including General Motors, Chrysler, Worldcom, Texaco — the list goes on. What happened to their employee pensions?
The Pension Benefit Guaranty Corp. guarantees corporate pensions — up to a limit. So, lower-paid workers are generally made whole on the pension payments. But higher-paid executives and pilots who retired took a big haircut on their monthly payout. For 2012, the maximum guaranteed amount is $4,653.41 per month ($55,840.92 per year) for workers who begin receiving payments from PBGC at age 65.
But the PBGC does not guarantee state or municipal pension plans!
And that's the crux of the state and municipal pension wars. State taxpayers have to come up with the money to fund the pensions — at the expense of other state expenditures for things like education, social services and infrastructure. \If you keep watching the bankruptcy proceedings of the city of Stockton, it is very likely that for the first time you will see a bankruptcy court cut not only retiree health care benefits (which are less protected), but actual monthly pension payouts to former employees who are already retired!
That would set a dangerous precedent. And that's The Savage Truth.