Monday, December 23, 2013

Trust Counsel: California Pensions More Secure Than Detroit's

After a Michigan bankruptcy judge opened the door to cutting public employees' pensions as part of the City of Detroit's bankruptcy, some observers suggested the ruling opens the door to similar tactics in California. But as Harvey Leiderman, the well-regarded trust counsel to CalPERS and other retirement systems, recently explained, California's pensions are very different from - and more secure than - Detroit's.

Leiderman explained Michigan's pension system hinges on a contractual relationship between two groups: retirees and employers, making it more vulnerable to impairment in bankruptcy.  That's because bankruptcy courts (unlike employers themselves) have special powers to impair contracts.  California's system, however, has three groups: retirees, employers, and pension trusts, such as CalPERS.

Leiderman explains that California's system includes legal duties between employers and pensions trusts on the one hand, and pension trusts and retirees on the other.  These duties are the product of state laws, not contracts.  He used this chart to illustrate the relationship:

Thus, even without contracts, California public employers have a duty to pay CalPERS and CalPERS has a duty to pay retirees.  Read the full article here.