Bankruptcy - No Pension Panacea

In the 2010 San Diego City Council race, and in previous mayoral campaigns, the idea of bankruptcy for San Diego has been proffered. However, neither Vallejo, which survived bankruptcy, nor Stockton, now going through bankruptcy have demonstrated that public employee pensions can be discharged in bankruptcy court, at least in California. In California, after the Vallejo experience, the state passed laws requiring that cities contemplating bankruptcy enter into a mediation process. This requires that the city negotiate in good faith with creditors prior to entering bankruptcy proceedings. One group for whom there is no negotiation are the labor unions pensions. From Reuters:

Calpers and unions around the country have made it clear they see a pension as an iron-clad right, one that's legally protected even in a bankruptcy.

Whether pensions are contract rights, which can be changed, or property rights, which are protected under the U.S. Constitution, has never been tested in court.

My question is what happens when the pension costs exceed all other sources of revenue? Who pays then? In Providence, RI, the answer seems to be that if the money is really gone, then the city will have to go to court. From the New York Times:

. . . the Providence City Council signed off on a plan to end, for now, annual cost-of-living increases for about 3,000 retired police officers, firefighters and other employees getting city pensions. The change would save about $16 million in the 2013 fiscal year, the mayor said; cost-of-living increases would be reinstated once the retirement system is 70 percent financed, which could take well over a decade. The change would also apply to current city workers once they retire.

In an interview at City Hall last week, Mr. Taveras, a first-term Democrat, said he “absolutely” expected a lawsuit to delay the freeze on cost-of-living increases for pensioners. But he said he saw no alternative for the city of 178,000 short of receivership, which would allow for a bankruptcy filing.

“It could drag out,” the mayor said of the expected legal battle. “But if we can’t reform our pensions, I don’t see how we can move this city forward. You could raise taxes, but I don’t think you can raise taxes enough to cover the cost of this.”

This case might make it to the Supreme Court on the theory that the city, as an extension of the state is violating the 10th amendment of the constitution:

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

I quoted the entire amendment, bu the key passage is "Law impairing the Obligation of Contracts." There are a number of counter-arguments, but I expect this to hit the Supreme Court sooner or later.