Bankrupt Vallejo Not Touching Pensions

This morning, California pension blogger and former U-T reporter Ed Mendel had a story on the initial plan that the Bay Area city of Vallejo is proposing to emerge from its two-year-old bankruptcy. I decided to take a closer look at the city’s recovery plan.

The plan does not include a reduction in employee pension benefits, even though at $195 million they’re the largest single debt the city has. The reason? They’re protected by state law.

Here’s the relevant section of the plan (p. 20 of the PDF):

The accompanying financial projections are newly formatted to separate the cost of current program services from the debt payments on the city’s legacy costs, which amount to hundreds of millions of dollars in obligations that the city shoulders now for services rendered in the past, including bonds, retiree pensions, and retiree health benefits. These legacy costs consume a large and growing portion of the city’s annual budget that limit the funds available for current services. The largest of these obligations, retiree pensions, are obligations protected by state law that are accordingly not proposed for adjustment through the bankruptcy case (emphasis added).

The implications for San Diego are significant, especially as bankruptcy talk now has snowballed to include City Council members dismissing it on national television.

Vallejo’s plan supports the positions of San Diego Mayor Jerry Sanders and City Attorney Jan Goldsmith, who believe the city could not overturn pension benefits — the city’s most crushing liability — through bankruptcy.

The federal bankruptcy judge in the Vallejo case appeared to open the door to changing pension benefits by voiding some of the city’s labor contracts in September.

Panelists at a forum on municipal bankruptcy hosted by the San Diego County Taxpayers Association last fall said pension benefits could be changed in bankruptcy.

— LIAM DILLON