Can L.A. renege on pension promises?

Sure it can - if the city files for Chapter 9 bankruptcy protection. Go back to 2009 when the city of Vallejo faced just a circumstance, and a federal judge ruled that state labor laws cannot overrule provisions of the bankruptcy code. "By authorizing the use of Chapter 9 by its municipalities," the court ruled, "California must accept Chapter 9 in its totality; it cannot cherry pick what it likes while disregarding the rest." Two lawyers who specialize in bankruptcy cases, James A. Chatz and Marc S. Zaslavsky, have written an interesting and informative essay on the subject.

Chapter 9 provides arrows in a quiver for negotiations and some real weapons to create leverage for settlement. Under Chapter 9, a Bankruptcy Judge can review and reject previous pension plans and can provide temporary and long-term relief for monies going into the program.

Here's the gist of it:

The Court went on to hold that unexpired collective bargaining agreements are executory contracts subject to rejection under section 365 of the Bankruptcy Code, and a municipality may reject an unexpired collective bargaining agreement if the municipality shows: (1) the collective bargaining agreement burdens the municipality's ability to reorganize; (2) after careful scrutiny, the equities balance in favor of contract rejection; and (3) reasonable efforts to negotiate a voluntary modification have been made, and are not likely to produce a prompt and satisfactory solution.

This is no doubt what former Mayor Richard Riordan and others were getting at by suggesting bankruptcy as a way of restructuring the city's finances. (The irony is that Vallejo chose not to touch the existing pension plans, which in some cases topped $300,000 a year.) Clearly, trimming down pensions is not a perfect answer - overly generous as they might have been. But what would you rather see: Drastic reductions in city services (we're talking police, fire, garbage - pretty much everything) or an adjustment in benefits? The City Hall brain trust keeps insisting that it won't ever come down to that, but can anyone over there explain - fully and completely - how the city expects to fulfill those enormous pension obligations? That's the problem - no one has the first clue of where all this money is supposed to come from.

Steven Greenhut, director of the Pacific Research Institute's Journalism Center in Sacramento, put it this way in a WSJ oped:

If officials are unwilling to demand pension concessions in bankruptcy, there will be few choices left to balance their budgets other than support from the state that itself is facing steep budget deficits, or local tax hikes that could undermine local economies and thereby drive down tax revenues over the long term. That's a sobering thought in what is an already struggling economy, and an argument for government officials to be much more stingy in granting pension increases in the first place.

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Mark Lacter
Mark Lacter created the LA Biz Observed blog in 2006. He posted until the day before his death on Nov. 13, 2013.
Mark Lacter, business writer and editor was 59
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