Last month, the city of Stockton became the largest American city to file for bankruptcy.

And like Vallejo, it doesn’t appear Stockton will be trying to cut pension benefits for current workers or retirees. Instead, it will follow Vallejo’s lead and go after retiree health care. From Reuters:

Stockton officials have repeatedly said the city faces a crushing liability of $417 million for its retiree medical expenses and that those costs must be reined in.

In its statement Wednesday, the city also contended that altering pensions would make it “nearly impossible” to recruit and retain good employees, but that cutting healthcare benefits would not have such consequences.

For a while, we’ve detailed the legal machinations behind efforts to cut existing pensions. San Diego has had a decade of pension-related woes and most of the proposed solutions affect newly hired employees, which does little for the large debt already on the books.

Last year, the Rhode Island city of Central Falls successfully cut pensions for retirees through bankruptcy and a Penn law professor believes the city could have been a tipping point. More recently, a Minnesota law professor contended state courts have erred in ruling that pensions for current workers can’t be touched.

In Vallejo’s case, The New York Times reported that state pension giant CalPERS threatened massive legal action if the city tried to go after pensions when it was in bankruptcy, and the city decided not to take the risk. Stockton officials are following suit.

One other Stockton bankruptcy note is relevant to San Diego: Part of Stockton’s debt comes from a $121 million loan it took out to pay down its pension debt in 2007. The loan was remarkably ill-timed as CalPERS lost 24 percent on its investments in the following year’s market crash. That means it only increased the city’s pension-related debts, rather than decreasing them. California Common Sense pointed to the bad pension bond bet in its take on how the city went bankrupt.

Stockton’s situation highlights the risk in mayoral candidate Bob Filner’s plan to take out a similar loan to pay down San Diego’s pension debt. Annual investment returns need to exceed 7.5 percent for the deal to pay off or the loan can just add to the bill.

Liam Dillon is a news reporter for Voice of San Diego. 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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