The San Bernardino, California City Council voted yesterday to seek bankruptcy protection after being told by the interim City Manager, that it would not be able to make payroll through the summer months.

San Bernardino, a city of more than 200,000 was not the first major city in California to move forward with bankruptcy proceedings nor is it likely the last. Stockton, CA, filed for bankruptcy protection late in June and with a population of nearly 300,000, the largest US city to go bankrupt.

While the recent housing market downturn hit California harder than most states, reducing property tax receipts and the general tax structure for the state makes it very susceptible to economic downturns, one particular cost is common to both bankruptcies: pensions.

In the case of Stockton, it offered extremely generous pensions that would allow public safety employees for example, to retire at 50 at 90% of pay. A quick look at Stockon’s Retirement System shows how just how generous these plans are, to the point that the city pays the full cost for nearly every pension plan. In other words, most employees do not pay a dime towards their retirement. Fire, Police and all non-public safety employees have what is ostensibly their portion of the pension bill paid for by the city. The only two groups who have to pay anything are police management and ‘miscellaneous trades employees’ and even then, the city picks up about 60% of the employee portion of the pension bill.

In the budget analysis done for San Bernardino earlier this week, the analysts specifically spelled out pension costs as a source of the city’s predicament:

“The city’s fiscal crisis has been years in the making, compounded by the nation’s crushing recession and exacerbated by escalating pension costs, lucrative labor agreements, Sacramento’s raid on redevelopment funds and a city reserve that is tapped out.”

San Bernardino too has sweet-heart deals with labor groups over pensions in which the city would pick up most, if not all of the employee share of the pension. While negotiations prevented giving this deal to new employees, existing employees still do not have to contribute to the cost of their pension.

California Retirement System (CALPERS) spelled out in 2011 its view, that once an employee is in the system, no changes can be made, making pension agreement a de facto guarantee of benefits for life.

It remains to be seen in the coming weeks and months if other cities in California will follow the same path, but when it comes to pensions, there is a precedent in how they are dealt with.

Vallejo, CA, which declared bankruptcy a few years ago, had to continue making payments in full to CALPERS, at the expense of bond holders. Rather than everyone ‘taking a haircut’ on what they were due, CALPERS took the full share of what was due to them, and the bond holders received whatever was left.

However, as pointed out by the late John Petersen, what a bankruptcy court decides in terms of who gets paid when it comes to debts could have major implications, meaning CALPERS might not receive its full share as they did from Vallejo.