Bankrupt Detroit can cut pensions; big implications for California

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By Dale Kasler
dkasler@sacbee.com

Published: Tuesday, Dec. 3, 2013 - 9:13 am

Last Modified: Tuesday, Dec. 3, 2013 - 2:18 pm

In a case with major implications for California, a judge today ruled that the bankrupt city of Detroit can impose cuts to its municipal pension plans.

The ruling by U.S. Bankruptcy Judge Steven Rhodes could help bankrupt San Bernardino in a potential legal showdown with CalPERS over the sanctity of employee pensions.

According to the Detroit News, the judge said pensions are essentially the same as any other contract, and “it has long been understood that bankruptcy law entails the impairment of contracts.”

His ruling doesn’t automatically give San Bernardino, which filed for bankruptcy in 2012, the right to cut pensions, said James Spiotto, a Chicago bankruptcy lawyer who has followed both cases. But it strengthens the city’s hand.

“Obviously, it can be instructive,” Spiotto said.

CalPERS, which argues that pensions can’t be cut, has tried unsuccessfully to get San Bernardino’s bankruptcy filing thrown out of court, saying the city is just trying to get out from under its lawful pension obligations.

The city temporarily halted pension contributions to CalPERS right after going bankrupt, and while it has renewed the payments, it still owes the big pension fund about $15 million in past-due payments.

The San Bernardino City Council in October tentatively approved a bankruptcy reorganization plan that lays out how each creditor would be treated, including CalPERS. The plan remains confidential for now, but San Bernardino officials have spoken openly about their desire to reduce pension obligations. The city’s annual CalPERS bill runs about $24 million.

Neither CalPERS or the San Bernardino city attorney were immediately available for comment today.

Detroit officials at one time floated the idea of cutting employee pensions by as much as 90 percent. But the judge, in his ruling today, indicated that the city should proceed cautiously.

“This court will not lightly or casually exercise power…to impair pensions,” he said, according to the Detroit News.

Spiotto said courts have generally taken the view that, while contracts can be reduced in bankruptcy, the cuts need “to be the least drastic.” Retirees need to receive “everything that can be paid practically,” he added.

Call The Bee’s Dale Kasler, (916) 321-1066. Follow him on Twitter @dakasler.

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This morning a judge overseeing the City of Detroit’s fiscal sustainability ruled that the City can be afforded bankruptcy protection, meaning that all 100,000 of its creditors now stand to lose a significant portion of monies owed to them.

The most notable victims are the tens of thousands of retirees living off of pensions – many of whom will see an 80% obliteration of the retirement funds they believed they’d receive until they died.

Read more here: http://www.sacbee.com/2013/12/03/5966594/bankrupt-detroit-can-cut-pensions.html#storylink=cpy

Edited December 3, 2013 by lostinblue