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Before the holidays, I wrote about a case in Central Falls, R.I. that appeared to debunk the claim that cities couldn’t reduce pension obligations in bankruptcy.
The reaction from San Diego Mayor Jerry Sanders, City Attorney Jan Goldsmith and many of our readers was swift: You can’t apply lessons from a small Rhode Island town to San Diego and pensions remain inviolable.
During a holiday visit to my family in the City of Brotherly Love, I had coffee with University of Pennsylvania law professor David Skeel. He has been researching government insolvency and The New York Times quoted him in a couple recent stories about municipal bankruptcies.
Skeel called the claim that pensions can’t be reduced in bankruptcy “highly debatable.”
“It had previously been the third rail,” he said. “But after Central Falls, it’s unclear if it’s so much of a third rail anymore.”
Skeel, who is publishing a law review article about public bankruptcy, said he believes governments could reduce pensions significantly through bankruptcy.
He makes an interesting argument. Federal law protects individuals’ property rights. So is a pension a property right?
Skeel thinks it is, but only part of it. The part that actually is funded.
The major problem facing many municipalities like San Diego is the part of the pension promises for which they haven’t stored money away.
Skeel says then the property right could be just what the cities have on hand to pay for their pension promises, not the pension promise itself.
“The question is what is fully protected, the promise or the pool of funds?” Skeel said. “There is an argument, and I think it’s a pretty powerful one, that it’s the pool of funds.”
If Skeel’s right, that means San Diego could legally write off the entire $2.2 billion unfunded pension liability through bankruptcy. The $4.8 billion the city has set aside to pay pensioners couldn’t be touched.
Skeel emphasized that the prospect of reducing pensions in bankruptcy isn’t without significant risks. And, as others have pointed out, San Diego might not qualify for bankruptcy for numerous reasons.
Still, my argument from last month stands. Bankruptcy appears to be the only way the city could make a direct, frontal assault on its enormous pension obligations. Civic leaders need to stop pretending that doing so is impossible and instead argue why their solutions to the city’s pension and budget problems are better than a bankruptcy bet.
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 email@example.com or 619.550.5663.
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