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It was the most compelling argument against the city of San Diego declaring bankruptcy: Pension debts can’t be reduced. Since that was the city’s most outstanding burden, what would be the point of going to Chapter 9?

Now, it looks like a small, bankrupt city in Rhode Island is ready to debunk that claim. From today’s New York Times:

Retired police and firefighters from Central Falls, R.I., have agreed to sharp pension cuts, a step thought to be unprecedented in municipal bankruptcy and one that could prompt similar attempts by other distressed governments.

If approved by the bankruptcy court, the agreement could be groundbreaking, said Matthew J. McGowan, the lawyer representing the retirees.

“This is the first time there’s been an agreement of the police and firefighters of any city or town to take the cut,” he said, referring to those already retired, who are typically spared when union contracts change. “I’ve told these guys they’re like the canary in the coal mine. I know that there are other places watching this.”

The idea of declaring bankruptcy to deal with the city’s mounting burdens has long been a flashpoint of debate in San Diego.

After a task force of Mayor Jerry Sanders’ business confidants raised the idea in late 2009, Sanders and City Attorney Jan Goldsmith went on a public assault against bankruptcy. Sanders called bankruptcy a “con job” and Goldsmith said it wasn’t a “magic potion.”

Sanders and Goldsmith argued the city couldn’t use bankruptcy to reduce pension payments to retirees or current workers because the state constitution protected pensions. That meant bankruptcy couldn’t do anything about the $2.1 billion unfunded pension liability yoked to San Diego’s financial statements.

“Bankruptcy cannot be used to void employee pension benefits once they are vested, which occurs the first day of employment,” Sanders wrote in an op-ed.

In February 2010, I took a closer look at their argument. I concluded that no city had ever reduced pensions in bankruptcy before, but that a city conceivably could.

I’ve contacted both Sanders and Goldsmith’s offices for comment on the Rhode Island news and will update this post when I receive a response.

Liam Dillon is a news reporter for voiceofsandiego.org. He covers San Diego City Hall, the 2012 mayor’s race and big building projects. What should he write about next?

Please contact him directly at liam.dillon@voiceofsandiego.org or 619.550.5663.

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Liam Dillon

Liam Dillon was formerly a senior reporter and assistant editor for Voice of San Diego. He led VOSD’s investigations and wrote about how regular people...

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