Bankrupt Vallejo cuts retiree health, not pensions

The bankrupt city of Vallejo cut health care payments for retired employees, but an initial recovery plan does not touch pensions.

When the old port city on the far side of San Francisco Bay filed a rare municipal bankruptcy in May 2008, there was speculation about whether bankruptcy would become a way for deficit-ridden cities to shed crushing retirement debts.

In groundbreaking actions in the Vallejo case, U.S. Bankruptcy Judge Michael McManus in Sacramento ruled last March that city labor contracts can be overturned in bankruptcy, and then in September dissolved a contract after mediation failed.

A “workout plan” approved by the city council in December, described as an opening position in labor negotiations, cuts nearly all general fund spending, except for employee pensions.

At an update hearing this week, McManus suggested that he may expect the city to have a final plan to exit from bankruptcy this summer, which could give other troubled cities a better notion of the risks and rewards of bankruptcy.

The judge told Marc Levinson, the city’s bankruptcy attorney: “You can probably anticipate that . . . you are probably going to have to live with a summer deadline for filing a proposed plan … I’m not saying on that now.”

Retirement costs are by far Vallejo’s biggest debt. The top two creditors listed by the city in its bankruptcy filing were retiree health, $135 million, and the California Public Employees Retirement Association, $84 million.

Although Vallejo has been hit by declining property values and the loss of some businesses, the bankruptcy filing seemed to acknowledge that the city council had let labor costs get out of control.

The bankruptcy filing said the city expected to begin the fiscal year in July of 2008 with an estimate of $77.9 million in general fund revenue, less than its $79.4 million cost for labor.

Vallejo employees have some of the most generous retirement formulas. Police and firefighters have “3 at 50,” three percent of final pay for each year served when retiring at age 50, capped at 90 percent of final pay.

Most of the other Vallejo employees, “miscellaneous” or non-safety, have “2.7 at 55.” That’s more than the “2 at 55” formula for miscellaneous state workers, which is uncapped and can produce pensions equal to 100 percent of pay after 40 years of service.

The city’s workout plan said the CalPERS chief actuary, Ron Seeling, has been quoted as saying that the “3 at 50” formula is “unsustainable.” But how much of the pension cost would be reduced by the workout plan is not clear.

To replace losses in the historic stock market crash, the city would devise its own schedule to increase payments to the pension fund, replacing a three-year phase in of higher payments adopted by CalPERS for its local retirement systems.

Among the few details about the city’s alternative in the workout plan is a chart (p. I – 3) showing the annual city contribution for police and firefighter pensions would be $7.2 million next fiscal year, well above the $4.2 million under the CalPERS plan.

The city plan would avoid pushing debt into the future, reducing annual payments in the long run. The chart shows the annual payment under the city plan dropping below the CalPERS schedule in three years, $7.9 million compared to $8.4 million.

Is bolstering the pension system a move to reassure labor unions that their retirement income is secure, presumably making it easier at some point to negotiate new labor contracts that lower retirement costs?

Or does it reflect the widely held view that pensions are vested rights, contracts guaranteed under a series of court decisions, while retiree health care lacks similar protection and some think under a federal court ruling last year can be cut?

The city’s attorney, Levinson, declined to comment, citing attorney-client confidentiality. Mayor Osby Davis and two council members, Joanne Shivley and Stephanie Gomes, did not reply to e-mail.

Like many California governments, Vallejo has set aside no money to pay for future health care promised retirees. The workout plan would begin switching retiree health from pay-as-you go to prefunding, as recommended by a governor’s commission.

“The city’s commitment had been to pay virtually the entire health insurance bill for its retirees and their families for the rest of their lives,” said the workout plan.

The plan proposes to reduce retiree health payments to a flat $300 a month. The big cut would be expected to shrink the $135 million debt or unfunded liability for future retiree health care to $34 million.

Under retiree health cuts that began last month, said a court filing, only a few are reduced to $300 a month: retired executives and executive staff and city council members.

Other retirees who once received 100 percent payment of “any available plan” were switched to a basic Kaiser plan. Police receive 100 percent of the Kaiser cost, managers and professionals 80 percent, and firefighters and electrical workers 75 percent.

Attorneys for a retirees committee contend that the city has no authority to cut retiree health care agreements without a court-approved “plan of adjustment” to emerge from bankruptcy.

“Retiree health benefits are vested under state law and cannot be arbitrarily reduced or taken away,” attorney Daniel Coyle said in a letter to the city on Jan. 20.

The retirees committee plans to seek payment from the city for the cut in retiree health benefits. The workout plan has a $50 million “placeholder estimate” of claims that eventually will be filed by parties not paid during the bankruptcy.

A “pendency” plan imposed during bankruptcy allowed the city to freeze debt and modify agreements. Claims are expected to be filed for pay, retiree health, leave balances not paid to retirees, reduced payments to bondholders and other things.

The city’s general fund spending has dropped from $87 million two years ago to a projected $68 million this year. Police staff dropped from a high of 155 to 104, nine fire companies were cut to six, and staff paid by the general fund is down 31 percent to 340.

Now the city is waiting for an arbitrator to rule on contracts with firefighters and electrical workers, providing costs needed to complete a final plan. But revenue is limited, including $5 million in the workout plan for claims.

The city attorney, Levinson, told Judge McManus that the arbitrator asked what would happen if the ruling went against Vallejo and the city was unable to pay.

“This is whack-a-mole,” Levinson said he replied, referring to a game in which when one mole is whacked back into its hole, a mole pops up in another hole.

“If you order us to pay, we can pay the firefighters more,” said Levinson. “But it just means we have to lay off another 20 cops, or we have to not pave the roads at all.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/ Posted 5 Feb 10

17 Responses to “Bankrupt Vallejo cuts retiree health, not pensions”

  1. john moore Says:

    Ed. See Govt. Code sec.20487(Ca.) A chap. 9 judge cannot amend or set aside a Calpers contract(and that is that)

  2. Touch Love Says:

    John,

    And what will ..”and that is that” … mean when the money runs out ?

  3. Alexis Says:

    When the money runs out, that’s it! As a entrepreneur and small businessperson, I know that you can’t continue to give these “retirees” all this pay and benefits without consequences. We don’t have such lavish “plans” (defined benefit) in private industry, why should they have them in the public sector? The way things are now, is that a government “job” is the path to guaranteed standard of living for life. Forget it! There’s nothing wrong to provide them with a reasonable stipend, but 90-100% of pay? Come on now, let’s get real. By definition, public workers have an “occupation”. Their goal is to continue to occupy the position and gain sustainance. We in the private sector actually have to produce something that people need and want in order to succeed and survive. We have to please our clients and customers. Government does not have the incentive to do so. All it seems they do is come back to demand more. Well, the pot is now dry. Tighten your belts like the rest of us. Grow up, and get with the program. Nobody promised you a free ride for life! If you don’t like it, too bad!

  4. Metaphysical Says:

    I remain stunned at the still omnipresent entitlement mentality of public unions. Even in the face of economic disaster they still deem themselves entitled to pensions/pay/benefits the rest of us can’t imagine, yet are forced to pay for.

    Sorry, Mr. Moore, but what will you do when the money runs out and when taxpayers flee? You can’t legislate your way out of a terminal illness.

  5. BrocktonBoxer Says:

    Hahaha to John Moore! Then i would tell them at the end of their contract they are all fired! Yes you can fire them and maybe even if they have a contract. I would privatize the cops, firemen, teachers and the rest of what ever i could. Get rid of all the thief’s. It’s not right that they are stealing from your kids and grand kids.

  6. john moore Says:

    I am opposed to Govt. Code 20487.Here in Pacific Grove,Calpers has done us in and because of 20487 we are defenseless. We have eliminated most gov. services,except for safety,which is ironic.The answer to what happens when the money runs out is that the safety unions will get a judgment against the city to fund Calpers and the court will impose a tax to collect the money against all real prop. on the tax rolls(this happened in Mo. and Ill.) Prop. 13 is no defense.The city and county staffs will help expedite such a result to pay for their pensions.If Calpers cities could get pension relief in Chap 9,there would be hundreds of Chap 9s.The legislature or an initiative could eliminate 20847.Lets’ do it’ John Moore

  7. Metaphysical Says:

    Mr. Moore says”

    “If Calpers cities could get pension relief in Chap 9,there would be hundreds of Chap 9s”

    And your point is?

    Why would that be a bad thing? Taxpayers are sick of being hammered by unrealistically high pension obligations. Why do we pay people for often 2X how long they worked? Just not affordable….. Never was. Never will be.

    Public pay should reflect private pay, not surpass it. It should also reflect the peoples’ ability to pay. Cops at 100K+? Fireman there as well? Huge pensions? When did gov’t get to be the employer of choice? Nuts. Totally nuts.

  8. Concerned in Vallejo Says:

    ED

    Just want to add a couple of things. While it has been widely reported that Vallejo has come to terms with two of their unions (police & management), I’m yet to see it reported that the new deal for VPD gives the department a 6-8% wage increase this year (July 1) and additional sick leave hours. CAMP (management group) will also begin seeing raises beginning July 1, 2011. This happened to the disappointment of several dozen citizens that shared their opinion at council meetings. The unions had a very supportive city council majority.

    The other issue is regarding the “most generous retirement formulas”. Vallejo does have the 3@50 for Public Safety that included “Retroactive pension benefits” for all PS employees that were employed at the time (2001 I believe). But the other groups receive 2.7@55 PLUS Social Security.

    I hope people don’t use Vallejo as an example of how to manage the bankruptcy process.

  9. Touch Love Says:

    With Civil Servant PAY (w/o pensions & benefits) alone now greater than or equal to the pay in comparable Private sector jobs, the “standard” against which Public Sector Pensions & Benefits should be compared is … DOES THE MAJORITY IN THE PRIVATE SECTOR GET THIS. If this cannot be answered affirmatively, then Civil Servnats should not get it either.

  10. john moore Says:

    Allowing cities pension relief in a Chap 9 would be a good thing. It is the only way to get relief from existing defined benefit plans. Reform initiatives only provide relief for new hires,which is too late for most cities and the initiatives still leave cities and counties open to investment losses. What is needed is an initiative that eliminates Gov. Code sec 20487 and requires that gov. pension plans be defined contribution plans. Presently there is only one alternative for gov. entities like Pacific Grove that are under water. That is to slash salaries to reduce pension liability.That would make recruitment difficult,but not unreasonably so. John Moore

  11. Joe Pensioner Says:

    Alexis – get your head out of your ass. These lavish pensions you describe is the $100,000 a year club everyones crying about. Don’t forget, CalPERS has addressed this question already. These pensions represents less then 1% of all CalPERS retirees….1%. The rest (99%) don’t have it so lucky. The average monthly income of all retirees is pretty normal. So, your barking up a small tree. These people had a lot of responsibility during their careers, supervising a lot of people. Do you expect them to earn $5.00 an hour in retirement? The calculations are pretty simple, legal and approved by past Governors, the Legislature, the Unions and the Collective Bargaining process.

    Let’s see you try to be a police officer & CHP, patrolling crime ridden neighborhoods and patrolling our dangerous highways, work for Caltrans, working on and next to the highways, while you idiots drive by at 80 mph with your head up your ass talking on your cell phone or even texting, be a prison guard, guarding those scum bags, they call people, in State prison……you couldn’t do it princess. You’ve had it too easy behind your soft desk job and now you want to take away pensions from hard working, dedicated public servants that put their lives on the line everyday for people like you.

    CalPERS has been around for over 75 years paying pensions, collecting from 2500 agencies around the State, including the State itself and is over $200 + billion strong. Also, something you probably don’t know is that employees contribute almost half towards their own retirement plans. It will take a lot more then you people to take away vital pensions from people that have real jobs.

    Proponents have failed time after time to collect enough signatures to get anything even close to putting on the ballot….you know why?….because the taxpayers have chosen not treat the Police, Fire, Caltrans & Prison Guards like that, because they want us on the job taking care of business. The State needs to do everything they can to recruit AND retain these valuable public servants that protect your ass while your sleeping in your soft bed at night.

    So, if you don’t like it crybaby…..too bad, go stand out in front of Walmart with your petition and see what happens.

    Dedicated Public Servant – 36 years

  12. Joe Pensioner Says:

    Touch Love, how can the money run out? Your not doing your homework again. Your letting your bosses brainwash you. CalPERS controls the contributing rates and also has the authority to raise them anytime contributions fall short of meeting their retiree obligations. They collect from 2500 state wide agencies, including the State’s own contribution of
    $3.5 billion. Most of our benefits from CalPERS are paid for by pure investment returns. CalPERS must have at least a minimum of 7.75% rate of return on their vast investment portfolio to meet existing benefit obligations before raising any rates. Today, CalPERS’s Fund Market Value stands at $200.5 Billion with the CalPERS California Employee Retiree Benefit Trust, know as (CERBT), stands at $1.129 Billion. So, let’s hope that investment returns, return to normal so they don’t have to raise contributions.

    Dedicated Public Servant

  13. Joe Pensioner Says:

    You people that are crying about Public Employee Pensions, are just pissed and jealous now that your 401K’s (if you have one) are tanking with this economy and people are out of a job. Well, I don’t like to see that either, but State pay has always been behind the private sector, but the pension security and benefits were nice to look forward to. Pensions were never an issue in the history of CalPERS (75 years strong). Pension contracts even stood during the stock market crash in 1929 and the great depression. Don’t forget that less then 1% of all retirees are in that $100,000 club…..99% are not.

    What do you think most of us do, ride around in our Rolls Royces? I wish…..remember only 1%.

    Don’t worry, when the economy gets better, pensions will not be a concern anymore and you can go on crying about something else with your clipboards and petitions.

  14. john moore Says:

    Joe: You don’t get it’ Its’ not just the size of the pensions,its’ the Calpers investment losses. Here in Pacific Grove,we have a pension bond from Calpers losses in 2002 and now we are down 25 million more. The Unions run Calpers and they care not about risk.Pacific Grove has eliminated all children services and the library is barely open. Luckily we are crime free except of course for our local government.

  15. Joe Pensioner Says:

    Pacific Grove, one of my favorite places to visit. We like that mexican restaurant “Peppers”, that coffee place on the corner and Passion Fish restaurants.

    CalPERS invests for the long run, not the short run. They’re designed to fluctuate with the economy’s up’s and down’s. They’ve been up and down before, even during the depression of 1929. They need a minimum return of at least 7.75% and they’re at about 11.5% return right now. Don’t worry, CalPERS has plenty of money.

    PS: I went to school with a John Moore in Hayward, CA

  16. Joe the Plumber Says:

    Joe Pensioner is missing the point with his comment “Don’t forget that less then 1% of all retirees are in that $100,000 club…..99% are not.” I’m not concerned with what pre-1999 retirees are getting. This is NOT the problem. The problem is what current and future retirees will be getting. As as example, retiring San Jose police officers will take $100K/year pensions on average! This is published data and it’s not hard to see how it’s possible. The average San Jose police officer earns more than $100K/year. With 30 yrs of service at age 50 they will receive 90% of single highest year pay. If you want more data, it is all available online. The salary of every public employee is available online, you can filter the data by city, department, job title, whatever. See for yourself. I found very few San Jose police officers earning less than $100K/yr. You can also review their salary and contracts agreements, it’s all public knowledge. There’s no need to listen to Joe Pensioner and his misleading assertions. His opinion has no value. In addition, don’t fall for his lies about who contributes to the pension costs. Most cities cover the employer and employee portion of the payment — pick a city, look up the contract, it’s all there for you to see, don’t believe me or Joe Pensioner, look it up for yourself. And as far as police/fire jobs being so dangerous — again, look it up for yourself — they’re not at the top of the list. Depending on the city, it’s probably more likely to die on the job from chocking on a donut than from being hit by a bullet. Seriously, my brother-in-law works for a department that has never had an officer die in the line of duty — NEVER, not once! And spiking? You betcha! That’s the plan. Double-dipping? Sure, why not. When you’re a public servant there is no limit to the greed — $100K/yr is not nearly enough to support a public servant’s lifestyle. Most people would die of shock if they saw where my brother-in-law lived and knew how much he earned. Up until 10 yrs ago it seemed that 2% at 55 was enough but somehow 3% at 50 became what was necessary to recruit and retain these fine people. That’s a load of BS. There’s nothing else they are even remotely qualified to do where they could earn so much in addition to this level of generous benefits. I could go on all day but it’s truly pointless. The situation will right itself, it is not sustainable. The ones that got theirs, they are fine. It will be the next generation that will see the cuts. In the meantime, the quality of life for the citizens will deteriorate as more and more resources are shifted to cover the exploding costs of the pension system.

  17. Pete Says:

    It is time to end government unions. There is a parasitic relationship between the government and government unions that are killing the taxpayer hosts. Unions are now a cancer in this Nation and need to be dealt with as a disease.

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