Public employee pensions: Some contracts are more sacred than others

Third in a series on public pensions. The first is here and the second here.

Oct. 5, 2012

By Mark Cabaniss

On Wednesday, the city of Atwater declared a fiscal emergency, putting it on the path to become the fourth California city to declare bankruptcy this year, joining San Bernardino, Mammoth Lakes and Stockton.  Unfortunately, these four cities seem to be just the tip of the iceberg.  Many other California cities are rumored to be heading for bankruptcy as well, including, at least according to former mayor Richard Riordan, Los Angeles.

The common thread to these bankruptcies is  current retiree pension obligations, which were granted during the go-go years of the stock market and property bubbles, but which have proven dramatically, unbelievably unsustainable during periods of economic contraction, such as the one we are caught in now. For example, Gov. Gray Davis’ infamous SB 400, which in 1999 retroactively boosted state worker pensions, implicitly assumed that the Dow Jones Industrial Average would be at 25,000 by 2009.  (As of 9 am Friday, it is at 13,637.)

One reason that cities have chosen bankruptcy as a means of restructuring pensions, rather than choosing the more direct route of simply attempting to alter current pensions, is the widespread assumption that current public employee pensions are legally untouchable.  However, even though widespread and oft-repeated, this assumption may be wrong.  The only way to find out is to test it in court.  Such a court battle would, I believe, make plain the reality of the situation, which is that what seems to be a “complex legal issue” is in reality a political issue — nothing more, and, unfortunately, nothing less.

The naked political issue can be stated different ways.  In the “social justice” formulation, pension proponents state their argument as, “Is it right for government to just tear up its debts to retirees that have worked their whole careers for that money?”

“Social justice”

In their own version of the “social justice” formulation, pension opponents frame their argument as, “How much money must one group of people give to another group of people, when times are unexpectedly tough, as now?” Or, “Is it right for some politician to sell my children into slavery just to get himself elected?”

Since the “social justice” formulations are so fraught with emotion, simple numerical tautology may be the best and most honest way to frame the argument:  “If the government does not have the money to pay all pension obligations, must the government still pay all pension obligations?”

Obviously, this is a very contentious political issue. But if we frame it as a political issue, the solution presents itself, because it can then definitionally only be solved by doing what is politically possible in the first place, which means that any solution will have to get a majority of people to back it.  Therefore, one possible way to approach the pension crisis is to cut only the very highest pensions, those more than $100,000 per year which, according to CalPERS, only 2 percent of current retirees receive.

Currently, Social Security benefits, to which you have no contractual rights, are capped at a maximum of $30,156 per year. Implementing a pension cap of $100,000 per year would put the 2 percent in the position of arguing that they just can’t live on over three times as much money as everyone else, an argument to which the voters, the 98 percent, might not be sympathetic.

Pension abusers

To their credit, CalPERS has been taking the politically admirable step of going after some of the very worst pension abusers, such as former Bell City Administrator Robert Rizzo (former pension $650,000 per year; new pension $50,000 per year); former City Manager of Vernon Bruce Malkenhorst (former pension $540,000 per year; new pension $115,848 per year) and Scott Plotkin, former Executive Director of the California School Boards Association (former pension $205,000 per year; new pension $72,288 per year).

Nonetheless, such symbolic sacrifices will not be enough to make a dent in the problem. To have an effect, governments will have to make an across-the-board cut in current pension payments, by, for example, simply stopping the payment of benefits in excess of $100,000 per year. If they do that, they will soon find themselves in court, where the legality of the proposition “pensions are contracts and contracts are sacred” will be put to the test.

In evaluating this claim, courts will look to prior cases, in which governments have altered or torn up other contracts. They won’t have to look far; recent governmental actions in California show the government’s ongoing belief that it absolutely has the power to alter or amend or tear up contracts as it sees fit, to promote the governmental objective of ensuring the health, safety, and well being of the citizens.

Ironically, one of the warriors currently working hard to establish the legal precedent that, yes indeed, governments can tear up contracts, is none other than Lt. Gov. Gavin Newsom. He Newsome recently wrote a strongly worded letter supporting the idea of local governments using eminent domain to seize underwater mortgages at below-contract prices, and then resell them to the homeowners at the lower prices.  The idea is that government has an interest in stabilizing the housing market, and thereby stabilizing tax revenues.

Who would lose under the plan to use eminent domain to seize mortgages?  Obviously, the current owners of the mortgages, such as banks and funds owning mortgage-backed securities, would lose. But aren’t these mortgages contracts, and aren’t contracts sacred?  Yes, but some contracts are more sacred than others.

So how do you tell which contracts are sacred?  If the highest pensions were to be cut, how would the defenders of the 2 percent top pensioners explain the contradictory proposition that government can tear up some contracts when it feels like it and yet is absolutely forbidden to tear up other contracts, such as current pension benefits?

Although many lawyers will construct various arguments differentiating the tearing up of private mortgages from the tearing up of public pensions, perhaps the argument is best collapsed down to its most basic: the distinction between public contracts and private contracts. Stated simply, the defenders of the 2 percent believe that it is okay for the government to tear up contracts if doing so negatively affects the rights of private citizens; but it is not okay for the government to tear up public contracts if doing so negatively affects the rights of public employees.

In other words, they believe in an explicitly two-tiered society: government employees have inalienable rights, non-government employees have alienable rights. To put it even more simply, what they really believe is this: contracts which protect my money are sacred; contracts which protect your money are toilet paper.

Will this argument be a winner?  For myself, I wouldn’t want to make it.

32 comments

Write a comment
  1. Rex the Wonder Dog!
    Rex the Wonder Dog! 5 October, 2012, 09:12

    For example, Gov. Gray Davis’ infamous SB 400, which in 1999 retroactively boosted state worker pensions, implicitly assumed that the Dow Jones Industrial Average would be at 25,000 by 2009. (As of 9 am Friday, it is at 13,637.)

    Teddy is going to blow his top when he reads the truth, teddy HATES the truth.

    DJIA= 13,637, unfunded pension liability at CalTURDS= $500 BILLION!!!!!!!!!

    Reply this comment
  2. Rex the Wonder Dog!
    Rex the Wonder Dog! 5 October, 2012, 09:17

    The state can do whatever they WANT TO DO. They are sovereign entities, they answer to NO ONE. You cannot sue a state, not even it’s own citizens. CA can wipe out the pensions of everyone in CalTURDS and there is NOTHING anyone, and I mean ANYONE, can do about it.

    There you go, Rex just solved the pension problem in 15 seconds flat, if a dog can do it why can’t the clowns?????

    Reply this comment
  3. The Africanized Swarm of Ted Steele System
    The Africanized Swarm of Ted Steele System 5 October, 2012, 09:24

    Man– I live in the Poodle’s head don’t I?

    LOL

    HJey Poodleboi—- Any comment on your predictions in the pension rollback lawsuits in Orange County? Remember>??? You were the self proclaimed legal authority and boasted a win for months! Well, until you lost and then you’ve been silent….hmmmmm any comment?

    0 for 13 ™

    Reply this comment
  4. Ulysses Uhaul
    Ulysses Uhaul 5 October, 2012, 10:04

    Gloomers

    Do you feel manipulated? Are you down and sad..do you want to strike out….are you wondering why I don’ t move out of state….

    There is relief.

    PACK AND SHIP!!!

    Reply this comment
  5. Rex the Wonder Dog!
    Rex the Wonder Dog! 5 October, 2012, 10:36

    Teddy- my $100 bet STILL stands, Prop 30 = DOA baby. You want some of that smack down?? Didn’t think so lil one.

    When you want to back up that yapper let me know 😉

    Reply this comment
  6. surfpunk
    surfpunk 5 October, 2012, 10:51

    Uhaul, Have you at least considered what you would do if you did not get your pesnsion as promised?

    Reply this comment
  7. Hondo
    Hondo 5 October, 2012, 11:14

    ‘ If the government doesn’t have the money to pay all of it’s pension obligations, should the government be forced to pay all of it’s pension obligations?’
    And the answer is.
    THERE IS NO MORE MONEY LEFT TO STEAL!!!
    The town in Pennsylvania lowered everybody’s wages to minimum because there was no more money. A judge ruled the city must pay the full amount. But there was no money in the bank.
    The same with San Berdoo. How can they pay their pensions obligations when they only have enough money in the bank to pay one persons salary (they only had 140thou in the bank, enough for one secretary).
    Yes they can break their pension obligations when their bank accounts are empty which they are more and more.
    Hondo……

    Reply this comment
  8. Ulysses Uhaul
    Ulysses Uhaul 5 October, 2012, 11:16

    Surf…..pensions are from earned money and investment returns of the economy….what is wrong with that?

    Reply this comment
  9. Ulysses Uhaul
    Ulysses Uhaul 5 October, 2012, 11:19

    Carpetbagger and Poodle irregular today?

    Whine. Grunt. Moan..

    Yawn

    Reply this comment
  10. surfpunk
    surfpunk 5 October, 2012, 11:30

    Uhaul,Just trying to help,you should have a plan B.

    Reply this comment
  11. The Africanized Swarm of Ted Steele System
    The Africanized Swarm of Ted Steele System 5 October, 2012, 11:42

    LOL– still no comment almost 2 years running— from Poodle—- how did it feel to lose the oc pension roll back case after years of predicting the loss. Remember how SURE you were about the law? …..lol

    0 for 13 ™ !

    Reply this comment
  12. The Africanized Swarm of Ted Steele System
    The Africanized Swarm of Ted Steele System 5 October, 2012, 11:52

    Here’s a good plan b for you young folks!

    Do what I did….Pay off your house early— the ONLY way to go. Do whatever it takes. Then you can like like a king. I have a VERY tiny gov pension, a pretty good 401k that I rolled into an IRA with income production and capitol maint……but you have to pay off the mortgage my little trolls!

    Do it girls!

    Ted Steele, Financial Advisor to The Stars!

    Reply this comment
  13. The Africanized Swarm of Ted Steele System
    The Africanized Swarm of Ted Steele System 5 October, 2012, 11:53

    oh….and ALWAYS……………………….wait for it………………………………………PACK N SHIP !!

    Reply this comment
  14. Ulysses Uhaul
    Ulysses Uhaul 5 October, 2012, 12:39

    Plan b. Get a government job.period. you’re taken care of….

    Reply this comment
  15. The Africanized Swarm of Ted Steele System
    The Africanized Swarm of Ted Steele System 5 October, 2012, 14:33

    the gloomers want no one taken care of. sad people

    Reply this comment
  16. Sean Morham
    Sean Morham 5 October, 2012, 15:05

    The new morality is: get a house from the gov t; down payment is a non taxable grant.2. Housing rule: Number of bedrooms minus one equals thenumber of families that can live there. i.e 4 bedroom tract house is a 3 family, all the kids go in one room. Split the gov t reduced mortgage among the fellow tenement dwellers. 3. Get all the discounts PGE offers. Turn AC on, open all the windows. Copulate….

    Reply this comment
  17. Ulysses Uhaul
    Ulysses Uhaul 5 October, 2012, 17:34

    Sean…..whoa guy! Your reality…not ours!

    Reply this comment
  18. The Africanized Swarm of Ted Steele System
    The Africanized Swarm of Ted Steele System 5 October, 2012, 20:43

    Sean– in psychological terms we would say that you are “projecting”.

    Reply this comment
  19. Rex the Wonder Dog!
    Rex the Wonder Dog! 5 October, 2012, 21:40

    LOL…the dork with 100 sock puppets is claiming OTHERS are “projecting”…..OMG, I can’t stop laughing!!!!!!!!!!!!!

    Reply this comment
  20. The Africanized Swarm of Ted Steele System
    The Africanized Swarm of Ted Steele System 6 October, 2012, 08:16

    Poodle…care to comment on your legal reasoning behind your giant pension lawsuit failure?

    Reply this comment
  21. Ulysses Uhaul
    Ulysses Uhaul 6 October, 2012, 08:34

    Poodle is incapable of living with fate…..a bitter 0 for 14……19……2134.

    Prop 30 rocks

    Reply this comment
  22. Rex the Wonder Dog!
    Rex the Wonder Dog! 6 October, 2012, 09:16

    Teddy, why don’t you take yourself and the sock puppets to the beach today, give your wimpy fingers a rest from the keyboard whoppers for the day 😉

    Reply this comment
  23. Ulysses Uhaul
    Ulysses Uhaul 6 October, 2012, 11:35

    Poodle take your Quad down to the do your own car wash and hose/ suds down your Kohl’s briefs and cholo tees, monthly outing.

    Big Betty stopping by your trailer later for Kessler on the rocks and jalapeno poppers! Be ready…

    Reply this comment
  24. Rex the Wonder Dog!
    Rex the Wonder Dog! 6 October, 2012, 23:28

    Teddy, 122-0 BABY !;)

    Reply this comment
  25. Rex the Wonder Dog!
    Rex the Wonder Dog! 6 October, 2012, 23:28

    😉

    Reply this comment
  26. The Africanized Swarm of Ted Steele System
    The Africanized Swarm of Ted Steele System 7 October, 2012, 21:23

    LOL—- Kessler’s with Big Betty! What a life Zero the Poodles got!!!

    Reply this comment
  27. Rex the Wonder Dog!
    Rex the Wonder Dog! 7 October, 2012, 22:15

    Teddy, you misspelled your sock puppet!

    Reply this comment
  28. The Africanized Swarm of Ted Steele System
    The Africanized Swarm of Ted Steele System 8 October, 2012, 08:20

    Zero– Did ou wake up with Big Betty this am?

    Reply this comment
  29. Rex the Wonder Dog!
    Rex the Wonder Dog! 8 October, 2012, 08:56

    I cannot wait until Nov 6, and notch another win with my perfect predictions 😉

    Still scared of that $100 wager Teddy?? Make it thru oen of your sock puppets then when you lose you won’t have to pay up 😉

    Reply this comment
  30. Rex the Wonder Dog!
    Rex the Wonder Dog! 8 October, 2012, 08:57

    Here, how about this-instead of $100, if you LOSE (which you will) you retire Queeg and Uhaul, and if I lose I will never post here agian. You game for that action troughie ?? 🙂

    Reply this comment
  31. Sean Morham
    Sean Morham 8 October, 2012, 15:57

    Ulysses’s new neighbors will be fornicating cannibals, unhappy with the SNAP prgram. Now what? Who you is?

    Reply this comment
  32. Rex the Wonder Dog!
    Rex the Wonder Dog! 10 October, 2012, 11:38

    Rex the Wonder Dog! says:

    Here, how about this-instead of $100, if you LOSE (which you will) you retire Queeg and Uhaul, and if I lose I will never post here agian. You game for that action troughie ??
    ==

    I KNEW Teddy would tuck tail and run for the hills…………….

    Reply this comment

Write a Comment

Leave a Reply



Related Articles

Moody's Views of Brown's SOS Speech

FEB. 1, 2011 By WAYNE LUSVARDI In a press release dated Jan. 27, Moody’s credit-rating agency began adding unfunded public

Critics slam state property sale

APRIL 28, 2010 By KATY GRIMES Recently, Department of General Services (DGS) Director Ron Diedrich removed several of the oversight

Fighting public service ‘corruption’

Aug. 27, 2012 By Steven Greenhut SACRAMENTO — During recent travels to Madison and Milwaukee for some research about reform-minded