Implode-o-Meter News - Untouchable Pensions in California May Be Put to the Test

For Calpers, the prospect of a California city in Federal Bankruptcy Court portends a potential test of the constitutional mandate that federal law trumps state laws -- in particular, the state laws that protect public workers' pensions in California. Such a challenge could blow a hole in what experts consider the most airtight pension protections anywhere.
"Obviously, what Calpers wants is that it doesn't come up in the process, which I think is ridiculous," said David A. Skeel Jr., a law professor at the University of Pennsylvania who writes frequently on bankruptcy. "My view is that even the California Constitution is subsidiary to federal bankruptcy law."

What bothers us is that in these sorts of discussions still no one is talking about the 800 lb gorilla: that inability to pay, as a practical matter, trumps all bankruptcy law (federal or state).

In the Stockton issue (as in other municipal bankruptcies cropping up around the country), this turns into a "federal bankruptcy vs. state pension law" debate -- inane because it simply doesn't matter what state law says: the money isn't there.

But importantly, even federal law often fails to acknowledge the reality of inability-to-pay: consider the bankruptcy "reform" act of 2005, which eliminated the ability of judges to "cram down" mortgage debt. That's good and nice for the banks (in the short run, at least), but at the end of the day, it doesn't actually increase the ability of underwater borrowers to pay back inflated mortgages.

Relevant:

Untouchable Pensions in California May Be Put to the Test