As attorney Mark Cabaniss wrote on this news site in Sept. 2012:

“Even if politicians’ pensions are contracts protected by the Constitution, they are still breakable.  In pretending otherwise, the politicians are lying.  In other words, merely noting that pensions are contracts protected by the Constitution is not the end of analysis, but only the beginning, for all contracts are breakable, and all constitutional rights are subject to limits.”

Now the Los Angeles Times reports:

As millions of private employees lost their pension benefits in recent years, government workers rested easy, believing that their promised retirements couldn’t be touched.

Now the safety of a government pension in California may be fading fast.

It cited Stockton’s bankruptcy:

In his written opinion, U.S. Bankruptcy Court Judge Christopher M. Klein blasted CalPERS as “a bully” for weighing in on the proceeding to insist — wrongly — that the city had no choice but to pay workers their promised pensions.

Karol Denniston, a public finance lawyer at Squire Patton Boggs, said Klein’s ruling was “critical for every municipality in California.”

“Next time we see a Chapter 9 bankruptcy filing,” she said, “pensions will be up for negotiation just like every other creditor.”

The skyrocketing bill for pensions is a problem for cities across the state. Californians now owe nearly $200 billion for pensions promised to state and local government workers, according to an analysis by Adam Tatum, research director at California Common Sense, a nonprofit think tank.

The key event will be the next recession, when more may go bankrupt and face: a) eliminating key services, such as police and fire, that are the reason governments exist in the first place; b) raising taxes to unsustainable levels that drive out business and personal taxpayers; c) cutting pensions, despite what the California Constitution supposedly says; or d) some combination of the above.

When there’s no money, there’s no money.

Also stiffed will be bondholders. That puts at risk other municipal bonds throughout California. And it will mean higher costs to service future bonds, such as the $7.5 billion in water bonds on the Nov. 4 ballot as Proposition 1. Investors understandably will demand higher interest rates for any bonds emanating from the Pyrite State.

Which means taxpayers again will pick up the tab.

The city sensibly argued that Klein’s action also puts it at risk for another bankruptcy. “But Klein said Thursday that Stockton’s plan for paying creditors over the years was adequate and passed all legal tests,” reported the Los Angeles Times.

But that’s just what has happened to Vallejo after its 2008 bankruptcy also left it forced to pay full pension benefits. As CNN reported in March:

“The California city of Vallejo emerged from bankruptcy just over two years ago, but it is still struggling to pay its bills. The main culprit: Ballooning pension costs, which will hit more than $14 million this year, a nearly 40% increase from two years ago.”

Meanwhile, the California Public Employees Retirement System has been spiking pensions again.

Next up: San Bernardino’s bankruptcy. In September, Judge Meredith Jury ruled the city unilaterally could cut firefighter pensions. We’ll soon see if her ruling sticks.

Meanwhile, as James Poulos reported on our website, the state is spending so much on pensions its roads are crumbling to dust.

Well, I guess it’s ok to make sure state pensioners, more than 16,000 of whom now pull down $100,000 or more a year, can enjoy their retirements in Lucullan luxury on their Idaho ranches.

By Chris Reed

The stakes are immense in the four-day trial in Sacramento’s federal bankruptcy court this week. The New York Times frames the issue well:

“Wall Street is taking America’s biggest pension fund to court this week, for a long-awaited battle over who takes the losses when a city goes bust — workers and retirees, municipal bondholders, or both.

“Stockton, Calif., declared Chapter 9 bankruptcy last year after suffering one of the country’s sharpest riches-to-rags swings when the mortgage bubble burst. Struggling to stay afloat, Stockton has slashed tens of millions of dollars’ worth of city services — firefighters, senior centers, library programs for at-risk children — and said it would cut its municipal bond repayments to a degree never seen before in a municipal bankruptcy.

“But it has drawn the line at slowing down its current workers’ pension accrual, or cutting the benefits its retirees now receive.”

If judges pay attention to current events and tailor their opinions accordingly — as many legal scholars believe — then Judge Christopher M. Klein could strike a huge blow for pension sanity and for local and state governments avoiding catastrophe. The present status quo of services being scrapped and roads falling apart because of excessive government pension benefits isn’t just unsustainable. It’s horrible governance.

So how will Klein rule? He’s got a J.D. and M.B.A. from the University of Chicago, which is about the best possible pedigree for those hoping he strikes a blow for pension sanity. There’s no university in the nation more known for advocating economically rational, evidence-driven public policy.

And a commercial law expert’s analysis of an early Klein ruling in the Stockton case suggests he doesn’t believe municipal contracts are inviolate at all.

“Like many municipalities (and states, for that matter) Stockton owes its retired employees far more in pensions than it can hope to pay.  …  

“Stockton filed bankruptcy to avoid paying the benefits it had contracted to pay but could no longer afford. But wait, the retirees argued, Stockton is an instrumentality of the State of California and, as we have seen, the U.S. Const. Art. 1, Sec. 10 specifically prohibits the states from messing around with contracts. While admitting that the federal government’s constitutional bankruptcy power can discharge most contractual obligations, the retirees asserted that it cannot be permitted to do so in Stockton’s case without contradicting the constitutional text. The irresistible force meets the immovable object.

“An ingenious argument but Bankruptcy Judge Christopher Klein didn’t buy it. (Judge Klein’s lengthy opinion, Assoc. of Retired Employees, et al. v. City of Stockton (In re City of Stockton) can be found at 2012 WL 3193588.) First, he observed that § 904 of the Bankruptcy Code clearly prohibits the court from granting any interim relief to the retirees. Second, and much more fully reasoned (in anticipation of an appeal, one suspects), Judge Klein concluded that the Bankruptcy Clause in effect trumps the Contracts Clause, at least in this case. In short, the City of Stockton can ‘interfere’ with its ‘Obligation of Contracts'” because the State of California has permitted it to file for relief under Chapter 9 of the Bankruptcy Code.”

Pretty promising. Go, Judge Klein, go.