By: Joel Fox
One major battle to reform the public pension system is being played out over an assembly bill that would restrict the power of local governments to declare bankruptcy. Assembly Bill 155 by Tony Mendoza, D-Artesia, came out of the Senate Local Government Committee this week after Senate Pro Tem Darrell Steinberg dumped an opponent of the bill from the committee allowing the union backed bill to move along its way.
The bill is a power play by the public employee unions to stymie the use of bankruptcy as a device to reconsider public employee contracts. The bill surfaced after the City of Vallejo declared bankruptcy and used the bankruptcy laws to reconfigure pension provisions for new city employees and demand higher contributions in the retirement fund from current employees.
In an environment in which city and state officials are looking for ways to maneuver past fiscal crises, public employee pensions and benefits have become a hot issue. Suggestions on revamping pensions and benefits have popped up from the governor’s office to non-profit foundations. Much attention has been focused on Steven Malanga’s essay in the City Journal laying California’s deficit problem at the feet of public employee unions.
In spite of overwhelming evidence backing up this claim, unions intend to fight back, arguing insufficient taxes are the problem. Yet, while a city like Vallejo has to set aside a huge amount of its budget for salaries, pensions and overtime, services have been cut. The city has lost one-third of its police force in five years.
Local elected officials are considering the bankruptcy route as a way to correct earlier poor fiscal decisions dealing with public employee contracts that have led their cities to the financial cliff. Former Los Angeles mayor Richard Riordan recently suggested Los Angeles’ problems can only be solved by declaring bankruptcy to control pension costs.
Instead of fighting multi-bankruptcy challenges at the local government level, unions want to gain more control through a state law. Mendoza’s bill would require local governments to get permission from the state’s Debt and Investment Advisory Commission before filing for bankruptcy. Supporters claim the bill is needed to prevent further deterioration of the state’s low credit rating.
Even the threat of local governments turning to the bankruptcy court puts pressure on local unions to reconsider current contracts. To relieve that pressure, Mendoza’s bill will build a firewall of sorts to delay the threat of bankruptcy from pressuring the unions.
Beyond the immediate strategy of handcuffing local governments is the broader effort by the public unions to stop reform efforts. Government reform often comes from the bottom up. If local governments use bankruptcy laws as a tool to refashion pension and benefit plans, such as creating a two-tiered pension plan for new employees, those reforms will spread. Fixing the pension problems at the local level can lead to reforms on the state level as well.
Joel Fox, is editor of Fox & Hounds and president of the Small Business Action Committee