When Loyalton canceled its contract with CalPERS and stopped paying, the state behemoth had two ways of handling the problem: place a lien on all municipal property and foreclose or cut what it pays on the pensions of the two retirees. Not surprisingly, CalPERS chose the later, cutting the current pensions by 60%. You can read the details here.
The retirees won't be happy, of course, but their recourse is against the city for their 40% shortfall, not CalPERS. Winning a lawsuit against the city should be easy enough. Collecting will be a different story.
While only a few folks need be concerned about Loyalton and its two retirees, all of us should be concerned about the underfunded pension obligations of many states, counties, cities, and other public entities. Even wealthy states like Texas are running the risk that they will go bust when the full flood of baby-boomer retirees demands their money. And what of Rust Belt states like Illinois with their aging populations?
Oh. And did you read about Dallas? Probably the worst-funded public pension with the exception of Chicago. Read all about it here. The Dallas police and firefighters plan, concocted by state legislators in 1993, is at such a precarious state that retirees are taking out their money in lump sums that are triggering substantial income tax bills.
Debt is a powerful tool but a seductive drug. Once hooked on debt, governments find it politically impossible to go straight; the pull of the quick fix is simply too strong. And don't forget that debt comes in two flavors. The ordinary sort in which a city borrows money for projects, some of which are necessary, some of which are not. The other flavor of debt, the one that has eaten Loyalton like a piece of popcorn shrimp and may soon take on the 64 oz. sirloin of Dallas are promises to retirees, promises in amounts that should never have been made and promises that cannot be kept.
For those of a more pedantic sort, check out my trifecta of Chapter 9 (municipal) bankruptcy articles: Municipal Bankruptcy: When Doing Less Is Doing Best (download here), Who Pays The Price? The Necessity of Taxpayer Representation in Chapter 9 (download here), Who Bears The Burden: The Place for Participation of Municipal Residents in Chapter 9 (download here). The first article in particular deals at length with the political, economic and demographic issues that underlay much of the current problem with public employee pensions.