Are California Pensions at Risk in Bankruptcy?

This period of economic downturn has affected many different financial aspects of businesses. An increasing number of business bankruptcies have affected employee protections such as pensions due to the protections granted to businesses in bankruptcy.

The California legislature and Governor Brown recently passed public pension reform that was careful not to affect any current or future recipients of state and local pensions.

This all comes as a result of many cities filing for bankruptcy. For example, the city of Stockton, which recently received bankruptcy protection, wants its bondholders to lose money while still paying almost $30 million each year into public pensions.

The bondholders are asking the court to find the city’s bankruptcy plan inadequate due to the amount still being paid to pensions and the large amount the bondholders will lose under the plan. The court responded that the purpose of the bankruptcy code is to adjust the debtor and creditor relationship to hopefully get the debtor out of debt.

Especially during economic recessions, businesses can quickly fall behind on bills. It doesn’t take much of a change in revenue to end up juggling payments to creditors. But filing for bankruptcy can help a business get through a tough time. Bankruptcy protection can stop creditor collection actions. This includes mechanics liens and repossession actions.

The outcome of most business bankruptcies is a debt reorganization plan. This allows creditors to begin to be repaid but generally also lowers interest payments and may eliminate penalties or fees for late payments.

Source: The Sacramento Bee, “Dan Walters: Bankruptcy ruling could alter California pension law,” Dan Walters, Sept. 17, 2012