On Friday the bankrupt City of Detroit unveiled a plan to cut the current pension benefits being paid to its already retired workers.
Many immediately seized on this news, believing that what’s happening in Detroit will also happen to bankrupt California cities like San Bernardino.
The Sacramento Bee reported the following:
In a case with significant implications for public pensions in California, the bankrupt city of Detroit proposed slashing retirement benefits by up to 34 percent in a plan unveiled Friday.
The city, which is $18 billion in debt, would cut pensions 10 percent for retired police officers and firefighters, and 34 percent for other municipal retirees as it tries to resolve the largest municipal bankruptcy in American history. Unsecured creditors would receive about 20 percent recovery, in the form of new securities issued by the city.
Detroit’s plan is being closely watched in California, where two cities are trying to exit bankruptcy and other cities are facing financial stress over rising pension costs. The city of San Bernardino has hinted that it might try to reduce its $24 million-a-year bill to CalPERS, although it hasn’t yet filed a reorganization plan. Last fall the city of Stockton proposed a bankruptcy plan that leaves pensions untouched but restructures much of its bond debt.
However, equating the different pension systems of the two bankrupt cities is the proverbial apples to oranges comparison and could lead many to the wrong conclusion.
As we previously reported, there are significant differences between the Detroit’s municipal pension system and the state pension system that San Bernardino belongs to.
CalPERS noted this in the Sacramento Bee article.
“…officials with CalPERS said California pensions have additional legal protections not available to workers in Detroit. Notably, California public pensions are protected by state law and the state constitution, according to lawyers for CalPERS.”
So if you are worried or excited about what’s going on in Detroit, don’t fret or celebrate just yet.
There are significant differences between the pension systems for each city and the laws that govern them, and the federal bankruptcy court takes that all into account in these cases – just as it did in Vallejo and Stockton where pensions were not changed.