Could the use of bankruptcy at the state or local level be used to roll back the CalSTRS benefit?

Ask Jack Jack Ehnes

A lot of hyperbole has been written about what “ought” to be done with regards to reforming, or lowering the cost of, public pensions. However, that’s very different from what “can” be done, legally.

California case law and the California and U.S. constitutions have enshrined the concept of legally binding contracts. Under that concept, once a public entity enters into a contract with employees, it cannot rewrite that contract without the agreement of the employee. Therefore, according to current law, CalSTRS core pension benefits (retirement, disability and survivor benefits) are guaranteed by both the U.S. and California constitutions.

There are currently many discussions taking place on pension reform which involve Governor Brown’s 12-Point Pension Reform Proposal. Read the FAQ on this site to learn how the Governor’s 12-Point Pension Reform Proposal would potentially impact CalSTRS members.

Much has also been written about the use of bankruptcy at the state or local level to skirt the responsibility for paying the pensions that have been promised. The roadblock to this approach is that a state cannot declare bankruptcy under current federal law. As a state-sponsored pension fund, bankruptcy is not a viable option to affect CalSTRS or its members.

CalSTRS officials have said and will continue to underscore that the reform needed for CalSTRS is the development of a long-term funding plan to address the system’s unfunded liability. CalSTRS is working with the Legislature, the Governor and its stakeholders to provide the data needed for the development of a funding plan, as only the Legislature and Governor have the authority to implement any contribution rate changes. Any changes to the contribution rates will probably be gradual, predictable and fair to all parties. It is also the best safeguard of reliable benefits to our members for the foreseeable future.

It’s important to note that the state is the plan sponsor of CalSTRS. So, if a long-term funding plan is not developed and the CalSTRS fund were to become depleted in around 35 years, the state will be obligated to pay the difference between the benefits paid and the contributions received.