ORANGE COUNTY REGISTER

Editorial: Bankruptcy as tool to save pensions?

The unfolding bankruptcy in the Northern California city of Stockton is revealing the lengths to which public officials are going to protect government union members from even the most modest cuts in their outsized pay and benefit packages.

In their latest objection to the city's Chapter 9 bankruptcy filing, Assured Guaranty – which insures the pension-obligation bonds that creditors issued to Stockton in 2007, when it was first unable to make ends meet – argues that the city is not actually bankrupt.

Instead, as the insurer explained in a statement, "[T]he city hopes to use the Chapter 9 plan process to cram down a nonconsensual plan on capital market creditors in order to free up cash to fund above-market labor and pension costs, while refusing to consider – much less implement – additional sources of revenue and much-needed expenditure reductions."

Assured Guaranty argues that the city "has budgeted itself into insolvency, viewing Chapter 9 as an option of policy, instead of the last resort." Its argument is that Stockton and its union-dominated City Council chose to stiff its creditors under the guise of bankruptcy so that it could protect the compensation packages of city workers.

It's hard to see where the creditors are wrong. The city did not embrace deep employee benefit cuts or $24 million in cost-cutting measures identified in a study. As the court filing noted, Stockton continues to subsidize "entertainment venues" and it even lavished benefit increases on public employees as it struggled with insufficient revenue.

Although we disagree with tax increases, Assured Guaranty is right to note that the city didn't even attempt to flex its taxing power before deciding to stiff its creditors. Nor did it try to work with the California Public Employees Retirement System to negotiate pension plan contributions. CalPERS is devoted to protecting unsustainable pensions no matter the cost to taxpayers or creditors and has defended the Stockton approach.

This is nothing new, we suppose. Vallejo emerged from bankruptcy last year by slashing public services, not by reining in absurd public-safety pay packages that led to firefighters earning a CEO-like $175,000 a year average in compensation.

Stockton apparently is following a similar strategy, which reminds us that municipal bankruptcy is not the panacea for overspending that many good-government activists had thought it was. And the state government is being equally irresponsible, as Democratic leaders preferred to saddle Californians with a massive tax increase (Proposition 30) rather than rein in pension costs.

Eventually the bill will come due. Unfortunately, officials in Stockton, Vallejo and Sacramento won't do the right thing as long as they find other suckers – whether creditors or taxpayers – to foot that bill.