CalPERS filed court actions against two financially troubled cities, San Bernardino and Compton, after they stopped making legally required payments to the big pension fund, a rare default not made in the Stockton and Vallejo bankruptcies.
For financially struggling local governments, an unauthorized halt or delay in payments to the pension fund is not something CalPERS wants to become widely viewed as a workable option.
CalPERS can offer some relief in hardship cases. But stretching out payments is limited aid for a deeply distressed local government, hit by falling tax revenue in a down economy and, in some cases, years of alleged overspending and mismanagement.
San Bernardino has skipped more than $5.3 million in pension payments to CalPERS since filing for bankruptcy on Aug. 1. Last week CalPERS urged a federal bankruptcy court in Riverside to delay action on the city’s eligibility for bankruptcy.
Compton, reportedly considering bankruptcy last summer, made partial payments to CalPERS but still owes $2.7 million for pensions and health care. CalPERS asked a Sacramento superior court in September to order full payment with interest and penalties.
Stopping pension payments to the California Public Employees Retirement System is a new development in the struggle by local governments to cut pension costs.
When Vallejo filed for bankruptcy in May 2008, asking the federal court to overturn labor contracts, some thought bankruptcy might be a way to cut pensions protected by contract law as a “vested” right under a series of court decisions.
A federal bankruptcy judge in Sacramento reluctantly overturned a Vallejo electrical workers contract, noting that under city law the result would be binding arbitration that could be done under the old contract.
After emerging from bankruptcy last fall, Vallejo officials said they considered trying to cut pension costs in bankruptcy, but chose not to cut pensions after CalPERS threatened a long and costly legal battle.
Alarmed public employee unions, led by firefighters, pushed legislation to make local government bankruptcy unlikely if not impossible. A compromise bankruptcy bill last year, AB 506, requires 60 to 90 days of mediation or a fiscal emergency.
Stockton went through a 90-day mediation with creditors before filing for bankruptcy on June 28. Its bankruptcy plan eliminates retiree health care but does not cut pensions, which city officials said are needed to remain competitive in the job market.
The plan also would cut $197.5 million in bond payments over the next 25 years. Two bond insurers urged the court to find Stockton ineligible for bankruptcy because, among other things, no attempt was made to negotiate a reduction in CalPERS debt.
Lawyers for the bond insurers think their best chance for relief is blocking eligibility for bankruptcy. Once bankruptcy is approved, the court can reject a plan to cut debt that is not fair to all parties, but the court cannot impose a plan.
If in negotiations during bankruptcy Stockton continues to argue that eliminating health care gives retirees a fair share of debt reduction, the bond insurers may lack leverage to get the city to agree to a cut in pensions and a lengthy battle with CalPERS.
Stockton spent months preparing for an orderly bankruptcy, bringing in a new city manager, consultants and an experienced lawyer who represented Vallejo in its bankruptcy.
With only two weeks of notice, San Bernardino filed for bankruptcy on Aug. 1, saying it needed the automatic stay of debt to have enough cash to meet payroll. The city declared a fiscal emergency, bypassing the lengthy mediation undertaken by Stockton.
In addition to halting payments to CalPERS, presumably out of necessity, the preliminary San Bernardino plan for operating during bankruptcy, a “pre-pendency plan,” contains an eight-page section on soaring retirement costs.
Retirement costs have increased from $6 million in 2000-01 to $22 million in 2009-2010 and are projected to reach $24 million in 2014-16. (See chart at the bottom of this post.)
The increased retirement costs are attributed to retroactive pension increases not paid for by past contributions, investment fund losses, changes in actuarial factors such as longevity, and a growing number of retirees with bigger pensions.
The plan said San Bernardino has cut its workforce by 250 positions and given new hires lower pensions. More cost-cutting retirement reforms are needed, said the plan, but none are proposed.
“The increased retirement costs that the city will experience are unsustainable,” said the plan, “and therefore, immediate major intervention is necessary now.”
The city attorney, James Penman, told the San Bernardino Sun newspaper the city convinced the three largest unions and bondholders not to object to the bankruptcy, which should reduce city legal fees said to have totaled $12 million in the Vallejo bankruptcy.
At the deadline last week, objections were filed by CalPERS, a small union representing mid-managers and several individuals. CalPERS urged delaying eligibility until the city produces credible financial projections and a plan for adjusting debt.
“Courts must view Chapter 9 (bankruptcy) petitions with a ‘jaded eye’ given the lack of control the courts have over municipalities such as the city once they are allowed into Chapter 9,” the CalPERS attorneys said, citing a court ruling.
The San Bernardino Public Employees Association objection accused the city of “intentionally running its finances into the ground” to create a fiscal emergency.
The union’s attorneys said a budget two years ago accurately projected the current deficit, about $45 million. The city budget passed last year was “designed to fail,” resulting as expected in the discovery of an emergency by new management last spring.
“The city willfully ignored viable revenue enhances and cost-cutting strategies for years in the face of severe financial strain,” said the union’s objection. “Chapter 9 is not a substitute for political will.”
In Compton, officials said in July the city was considering bankruptcy. The city has fired a city manager, auditors resigned rather than sign a 2011 financial report, and the mayor made unspecified charges of “waste, fraud and abuse of public monies.”
The new city manager, Harold Duffey, who took office in late July, said last week Compton has a balanced budget this fiscal year and expects to announce a new auditor soon to complete the 2011 report.
Duffey said Compton is unusual in having a parcel tax that fully funds pensions. He said the partial payment to CalPERS is caused by a “cash flow issue.” The parcel tax revenue arrives in December through June.
“By the time November is over with we will have brought the CalPERS account current,” he said.
The complaint filed by CalPERS in Sacramento superior court said Compton owed about $2 million as of Sept. 18, nearly $1.4 million for pensions and $641,000 for health care.
The total has since increased to $2.7 million, said Amy Norris, a CalPERS spokeswoman. She said CalPERS gave Compton more time to respond to the complaint, now due Nov. 2.