When ordinary folks or businesses become insolvent, they can go to their creditors and offer to make a deal. If their creditors agree, the debt-ridden individual or corporation can pay, say, 50 cents on the dollar, and thereby become solvent. Why would a creditor agree to take less than owed? Two reasons stand out. First, even today in the commercialized Western world, most people appreciate the virtue of forgiveness. Just as there is a moral obligation to pay one's just debts, there is a moral obligation to forgive in some circumstances. (For more about forgiveness in the world of bankruptcy law go here, here, and here.)
Second, and more pragmatic, creditors know that if they don't agree to take less than what's owed, their debtor may seek bankruptcy relief in which case the creditor might get even a smaller amount. The Constitution of the United States expressly grants Congress the power to create a bankruptcy law, which includes the power to discharge debts.
Why, might curious minds want to know, can't States do the same thing? In other words, can't California (acting through CalPERS) give Loyalton a pass?
Speaking constitutionally, does express delegation of the "bankruptcy power" to Congress impliedly prohibit the individual States letting their debtors pay less than what's owed? In brief, the answer is yes and in part from another provision of the Constitution that explicitly says that "No State shall pass any Law impairing the Obligation of Contracts." (The paired set of the bankruptcy power and the prohibition of impairment of contracts is evidence of the Hamiltonian pro-trade and commerce aspect of the 1789 Constitution.) (For more about the so-called Contracts Clause go here and here.)
What does any of this have to do with poor little Loyalton? According to the California courts since 1955, this means that neither the state not its subdivisions (like Loyalton) can reduce the pension benefits that existed as of the moment a public employee is hired. In other words, unlike any worker in any other business, the pay and benefits of a California public employee can never be reduced. A one-way ratchet, if you will.
Put another way, no matter how foolish or corrupt--once promised--pensions cannot be adjusted downward no matter how impossible it has become for a city like Loyalton to pay for them.
Or can't they? Go here to read a news account of a recent decision by the California of Appeals that evades the effect of the decades-old decision of the state supreme court and permitts the implementation of "anti-spiking" rules designed to prevent certain abuses of the existing pension system.
Whether the decision of the appellate court stands, and whether, even if it does, it can be extended to more fundamental aspects of the California pension system, remains to be seen. Nothing so far will help Loyalton but permitting some flexibility in the California system might help other public employers in the future