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A heated battle between a bankrupt California city and CaLPERS, the state pension plan, could provide a preview of a conflict likely to come to Canada. At the centre of the dispute is the rising tension between generous public-sector pensions and cash-strapped public budgets.

The dispute in California involves the bankrupt city of San Bernardino. The city's government has stopped making $2.4-million in monthly pension contributions to CaLPERs during the bankruptcy proceedings.

The pension fund claims this is illegal. CaLPERs is arguing that, as an arm of the government, it is entitled to its payments ahead of municipal bondholders. Bondholders, as you might imagine, are not enthusiastic about this notion. They say the pension fund's claim is legally shaky while the bonds involve a binding legal contract.

The California Supreme Court, and possibly the U.S. Supreme Court as well, will determine the fate of San Bernardino bondholders, but Canadians have reason to wonder if a similar dispute is in the offing here. Tensions between domestic public service unions, governments and economists are already rising.

In 2010, the conservative C.D. Howe Institute enraged the Canadian Association of Professional Employees (CAPE) by suggesting that the taxpayer liability for public service pensions was more than $50-billion higher than previously estimated. The union responded to the allegations by attempting to show that the formula for pension payouts – two per cent multiplied by years of service, multiplied by the average of five years' highest annual salaries – was not exorbitant.

The scale of public service employment in Canada will make the issue more problematic. Lakehead University economics professor Livio Di Matteo writes that "compensation of public employees in Canada as a share of GDP is second only to France. Moreover, between 2005 and 2011 … Canada had the most growth in this ratio, rising from 11.2 to 12.5 per cent. Believe it or not, Canada and Greece in 2010 both had the same public-employee-compensation-to-GDP ratio of 12.5 per cent."

The high percentage of Canadians in public service means that the costs of their pensions will become an increasing burden on the nation's remaining taxpayers as the boomers retire.

By CAPE's own calculations, 60 per cent of Canadians will not have employer pension incomes to supplement CPP in retirement. At some point – possibly when enough public servants retire to make tax increases necessary – this majority of Canadians will be informed that their taxes are being used to provide significant pension income to retired public servant who, in all likelihood, earned more in salary than they did. They are likely to be as thrilled as San Bernardino municipal bondholders.

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