The state of California and its citizens are being held hostage, by the funding of its public workers retirement plans. CalPERS, the city’s union that funds the worker’s pensions, is owed more than $200 billion dollars by the citizens of California. With the cities unable to pay up, many have filed for bankruptcy.
The controversy centers around two laws that were passed over 20 years ago, that CalPERS has used to create beneficial retirement plans for their employees. In the recent case of Stockton, California, a judge upheld a bankruptcy recovery plan that maintained the current public pensions. With the overturn of those two laws, the judge could have legally required them to cut pension, but didn’t.
Attention has now shifted to the town of San Bernardino, California, where two companies are claiming that they are owed money related to government pensions.
The Financial State of California
Financially, California is not in a good place right now, and much of it relates to the issues they are having with funding pensions. The two laws in play have helped CalPERS demand high amounts from cities; the first saying that no city could leave CalPERS if bankruptcy was filed, the second allowed CalPERS to seize city property until the debt was repaid. The debt to Stockton was $1.6 billion. But why is there so much trouble with paying?
The answer is because the amount due for the pensions of California workers is astronomically high. The plans many times include retirement ages of 50-55, payments that almost equal a full salary, and free health care. The benefits of government workers rise high above what many in the private sector receive. The city of Stockton pays an amount to CalPERS that is equal to 46% of their payroll; that number will rise eventually to 60%. These massive amounts of money demanded by CalPERS are pushing cities into bankruptcy at a high rate, and are also affecting other parts of the cities’ finances and that of the citizens.
In addition to affecting the ability of the government to pay CalPERS, the rising costs of pensions are also affecting their ability to build new roads, schools, buildings, and repair old ones. The citizens are also feeling the heat as the number of bankruptcies are rising all over the state. Some of the most successful law firms in California deal directly with bankruptcy cases; Doan Law Firm alone filed over 400 cases in just the third quarter of 2014. The good news however, is that there is a committee of 24 public unions that would be on board with giving up healthcare, which could save over $500 million.
The Situation in San Bernardino
The current law suit taking place in San Bernardino is different, but stems from the same issues that other cities are having. Like Stockton CalPERS has requested huge amounts of money to fund pensions. Also, like Stockton they were unable to pay and filed for bankruptcy. As part of paying the debt, the city borrowed $50 million dollars from two companies (one based in Luxembourg, and Ambac Assurance Corp.) to help pay it. Now those companies want their money back.
The argument of the two companies is basically that the debt owed to them is legally no different than the debt owed to CalPERS, and is suing the city for the amount owed. They feel they are entitled to payment of the debt, considering the city still pays CalPERS on the debt owed to them.
Both the City Manager and CalPERS have denied the claims of the two companies, and have asked the judge to dismiss the case. However, with the removal of two major laws that gave CalPERS its teeth it is not yet seen how the court will rule on this case.Copyright 2015 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.