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Here is the op-ed I authored last year setting out my views on bankruptcy.

In the op-ed, I pointed out that the city of San Diego did not need bankruptcy to address its pension problems, particularly in light of the city’s “impasse” process that gives the City Council power to impose. In addition to being unnecessary, I discussed three reasons against bankruptcy. Below are my updates on those three reasons and, at the end, what I think is the lesson from Central Falls:

“First, the City is not insolvent or qualified to file.”

Still true. The city is not close to being insolvent or qualified to file. Thus, bankruptcy is not even an option.

By contrast, Central Falls is insolvent. Central Falls could not now or in the future pay its bills.

“Second, consider the cost. Orange County’s bankruptcy cost $100 million 16 years ago when lawyers’ hourly rates were much lower. Although it is hard to estimate the full cost of a San Diego bankruptcy, a battery of lawyers would enjoy a nice stimulus package, probably costing taxpayers far more than $100 million.”

Still true. Lawyers drool over the idea of bankruptcy because of the fees that so many would share in. Reporters also drool over it because of the steady stream of easy stories.

“Third, there has never been a reported case in our nation’s history where public sector pensions were changed through bankruptcy. That would be new law to, ultimately, be decided by the U.S. Supreme Court after years of court decisions and appeals, during which pension payments would likely continue.”

Still true. But, if this goes through in Central Falls, changes would be achieved by agreement. So, unless individual retirees challenge the agreement, (which still is a possibility), the only legal principle that would be demonstrated is that retirees and the city can voluntarily agree to change vested rights. That is not a change in the law.

The issue left outstanding is whether the bankruptcy court could force a cram down plan that takes away vested pension benefits over the objection of retirees. If the agreement is challenged by an individual retiree who opposed it, that issue could be addressed and would likely go to higher courts.

Some might say that Central Falls illustrates the leverage that bankruptcy gives in negotiating pension changes. Certainly, that is one advantage of bankruptcy. But, I think the fact that Central Falls ran out of money was the key leverage. The most significant question is: Why did the Central Falls retirees agree to reduce their pensions? Their lawyer explained (as reported by the Wall Street Journal):

“We have many strong legal arguments,” Mr. McGowan said. “But in a practical sense, they don’t get you very far if the city has no money.”

Of course, sweetening the pot was the $2.5 million bailout likely to come from the State of Rhode Island as an inducement to the deal.

The overriding point is that Central Falls was running out of money. Significantly, Central Falls’ pension fund is approximately 15 percent to 20 percent funded, while San Diego’s is 67 percent funded as of June 2010.  (See the following link for a chart showing the funding status of R.I. cities.)

Central Falls is more like the Prichard, Ala. situation where the city ran out of money and stopped paying its pension obligations except that the Central Falls retirees decided to reach an agreement and the Prichard retirees did not.

Final Point: What is happening in Central Falls raises an issue that I did not cover in my op-ed.

I do think that Central Falls and Prichard illustrate something that I did not address in my op-ed: What happens if we ignore the future projections that show huge increases in the city annual required contributions? In Central Falls and Prichard, the cities simply ran out of money and pensions were at risk. That is what happens when pension reform is ignored. It raises the practicality that there is no money to pay the promised pensions. As the lawyer stated:

“We have many strong legal arguments,” Mr. McGowan said. “But in a practical sense, they don’t get you very far if the city has no money.”

I think Central Falls and Prichard demonstrate the importance of pension reform before the pension problems gets unresolveable. It also illustrates that it is in retirees’ best interests to participate in some way in that reform.

Jan Goldsmith is San Diego’s city attorney.

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