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Pension Showdown Brewing in California

The Wall Street Journal reports that San Bernardino, which filed for bankruptcy two months ago, has missed a $5.3 million payment to Calpers, the state pension fund, and is projected to miss further payments in the future. This is the first time a California city has refused to make its payments. Amid the subsequent confusion, both sides are digging in their heels:

“I don’t look at Calpers as being any different than any other creditor,” said Jim Morris, chief of staff to San Bernardino Mayor Patrick Morris.

Calpers argues that it cannot forgive or reduce a city’s pension contributions. The city of 213,000 people is effectively violating state law by stopping its pension payments, a Calpers spokesman said in an email.

Calpers, for its part, is looking to avoid a showdown with one of the state’s largest cities, but San Bernardino’s finances are in such bad shape that it may be unavoidable:

Pension officials said they would attempt to help San Bernardino get back on track, as the fund has done with other cities that fall behind. One option is to increase the amortization period of the obligations, a step that stretches out the payment period for cities.

But San Bernardino’s options may be limited. The city already amortizes its public-safety pension obligations over 30 years, the maximum allowed. Ms. Norris said it was rare for cities to become delinquent on their pension bills.

The stakes here are high for both parties. San Bernardino is desperate to save money anywhere it can, and pension contributions are among its largest costs. Calpers, meanwhile, wants to avoid setting a dangerous precedent that cities in trouble can refuse payments. There are plenty of distressed cities throughout the state, and they will be watching this showdown closely. If San Bernardino can get off without making payments, other cities will expect the same treatment, leaving Calpers with a serious crisis on its hands.

Regardless of how this shakes out, pensioners ought to brace themselves. Guarantees that pensions will be paid in full are looking shakier by the day as bankrupt cities try harder and harder to escape their obligations. Pensioners should begin to think about backup retirement plans, and soon.

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