Stockton bankruptcy: roll back pension ‘spiking’?

While ruling Stockton eligible for bankruptcy last week, U.S. Bankruptcy Judge Christopher Klein told losing bond insurer attorneys they can continue to pursue a cut in CalPERS debt, mentioning a rollback of pension “spiking.”

Bond insurers opposing Stockton’s eligibility for bankruptcy said they were being unfairly targeted for heavy losses while the largest creditor, the California Public Employees Retirement System, would be paid in full.

The judge said that as the city proposes a “plan of adjustment” to cut debt, bond insurers allied with bond issuers in the “Capital Market Creditors” can make their argument about fairly distributing losses.

Now the self-interest of “Wall Street financiers,” whose losses presumably would be reduced if pension debt is cut, may drive the issue avoided by public officials in the widely watched bankruptcies of several California cities:

Is bankruptcy a way to cut the growing costs of public pensions said by some to be “unsustainable”?

Public pension benefits offered on the date of hire are widely believed to be “vested” rights, protected under contract law by a series of state court decisions, that can only be cut if offset by a new benefit of equal value.

Vallejo officials said they decided not to propose pension cuts after CalPERS threatened a long and costly legal battle. But during a 3½-year bankruptcy a federal judge overturned a Vallejo labor contract, regarded as a precedent-setting first by some.

Stockton officials do not want to cut pensions said to be needed to compete in the job market. In deep cuts since 2008, the city argues, labor lost pay, retirees health care and citizens services, leaving cuts in bond debt as the only fair way to get more savings.

San Bernardino made an emergency bankruptcy filing, avoiding mediation with creditors under a new state law. The city is skipping a $25 million payment to CalPERS this fiscal year, but may want to restructure the payments rather than cut pensions.

Judge Klein sharply criticized bond insurers last week for walking away from Stockton’s mediation with creditors under the new state law when the city refused to consider seeking a reduction in its CalPERS debt.

The judge said under federal bankruptcy law Stockton had no “good faith” obligation to negotiate with CalPERS because the city did not intend to reduce its pension debt.

“This does not mean that there’s not potentially a serious issue involving CalPERS,” the judge said. “But at this point, I do not know what that is. I do not know whether spiked pensions can be reeled back in. There are very complex and difficult questions of law that I could see out there on the horizon.”

The judge said the Capital Market Creditors claim of “unfair discrimination” is not an eligibility question, but by law must be considered when the city proposes a plan of adjustment to reduce its debt before emerging from bankruptcy.

“The city is going to have a difficult time confirming a plan over an objection and claim of unfair discrimination without being able to explain that problem away,” the judge was quoted as saying in a court transcript posted by the city.

“And that problem is probably going to require me to get down into the nitty-gritty of the CalPERS situation. And I, at this point, have no clue how that’s going to come out, but that is the protection (for the creditors),” the judge said.

Stockton bankruptcy video used "Monopoly" board game theme

Stockton bankruptcy video used “Monopoly” board game theme

A problem facing bond insurers who want to cut CalPERS debt is the view, perhaps legally correct, that the pension fund is only a “conduit” or trustee for funds that actually belong to the members of the pension system.

“Referring to CalPERS is like referring to retirees,” the Stockton city manager, Bob Deis, said during a three-day eligibility trial.

If so, negotiations to roll back pensions improperly boosted through various “spiking” methods (usually adding to the final pay on which pension amounts are calculated) would have to include hundreds of scattered retirees.

Another way to cut CalPERS debt is a private-sector pension tool advocated by the watchdog Little Hoover Commission and others: Allow current workers to keep pension amounts already earned, but give them lower pensions for future service.

All new hires will get sharply reduced pensions under Gov. Brown’s reform enacted last year, AB 340. Why should current police officers, for example, continue to earn more generous pensions than new officers who are equally in harm‘s way?

The judge repeatedly has said that he wants a negotiated agreement on a debt-reduction plan. But if talks fail, he also has mentioned what lawyers call a “cram down,” confirming a plan of adjustment opposed by some of the creditors.

Bond insurers did not explore methods for cutting CalPERS debt during the eligibility trial. Now they have an opportunity to bring in actuarial experts and show the judge the “nitty-gritty” of potential CalPERS debt reductions.

Stockton officials acknowledged during the trial that city pay, with automatic increases tied to other cities that were “not reasonable comparisons,” was about 25 percent above the market.

Pay was said to be high not because of “base” salary but due to additional “premium” pay for longevity, education, specialty assignments and other things. A bond insurer attorney cited one of two employees paid more than $400,000 in one year.

“If that person left today under things I put in place, the pay off would have been reduced 75 percent,” said Deis, the city manager.

In a video explaining the bankruptcy quoted by bond attorneys, Councilwoman Kathy Miller said, “Employees made what’s known as pension spiking into an art form” to get “much larger pensions for the rest of their lives.”

When a bond insurer attorney, Guy Neal, asked Deis if the city had tried to recover or “claw back” excessive pay and pensions, Judge Klein asked the attorney if he meant “write a check” for past payments.

“Anything along those lines, your honor,” said Neal.

A skeptical Deis said an attempt to negotiate recovery of excessive pay or pensions would land the city “in front of the PERB (Public Employment Relations Board) for violating the state labor law.”

CalPERS reports show the average pension for safety (police and firefighter) employees who retired during the last five years is much higher in Stockton than in Sacramento, a larger neighboring city that shares the same broadcast television market.

The average pension among 112 Stockton safety employees retired for under five years was $88,091 a year, up from an average of $73,522 for the 65 safety workers retired for five to nine years.

The average pension among 190 Sacramento safety employees retired for under five years was $70,348 a year, up from an average of $68,948 for the 190 safety workers retired for five to nine years.

Why did the average Stockton safety pension increase 20 percent between the two five-year periods?

A city spokeswoman said one factor may be more recent retirees with a higher pay grade. CalPERS, which has an anti-spiking unit, did not respond to a request for a comment on the increase.

________________________________________________________

Average Annual Amounts for Retirees and Beneficiaries
(Excerpts CalPERS annual valuations – June 30, 2011, p. 29)

Stockton Safety

Stockton Safety

Sacramento Safety

Sacramento Safety

________________________________________________________

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 8 Apr 13

20 Responses to “Stockton bankruptcy: roll back pension ‘spiking’?”

  1. spension Says:

    Thanks for posting those tables at the end. Very illuminating, and, indeed, spiking in various ways looks to be a horrible Stockton problem. I sure hope the bankruptcy proceedings give some haircuts.

  2. Tough Love Says:

    A heck of a lot beyond reversing the “spiking” is needed.

    We must also reverse all “retroactive” pension increases applicable to service provided BEFORE the change … as this is nothing more than theft of taxpayers funds.

    Then, we must compare Public vs Private Sector pensions for comparably paid workers. With now equal Public and Private Sector “cash pay”, there is simply no justification for ANY greater pensions and benefits, let alone the multiples greater pensions promised today. Any Taxpayer-funded promises greater than what Private Sector workers typically get (INCLUDING the incremental value of younger full retirement ages, and COLA increases) should also be rolled back.

    To those who say “we earned that”, I say BULL and that the ONLY reason that EXCESS was granted was because the Public Sector Union bribed our elected representatives with campaign contributions and election support in exchamge for favorable votes on pay, pensions, and benefits.

    ALL of this should be rolled back immediately and taxpayers should refuse ANY further funding of these excessive Public Sector Plans until these reforms are implemented.

  3. Captain Says:

    Spension, what makes you think spiking is just a Stockton problem.

    Unfortunately the data you reference only provides average pension payouts without the all important “years of service” which is required to really make sense of it all. And, unfortunately CalPERS doesn’t provide data for average pension payouts based on 30 years of service. If CalPERS were really concerned with transparency, and I do think some on the CalPERS management team are concerned while the union dominated Board of Administration isn’t at all concerned/ interested, they would start providing data for the average pension based on thirty years of service. I won’t hold my breath!

    Spension, did you look at the pension increase for both Stockton & Sacramento for those retired 10-14 years vs. those retired 5-9 years? The Sacramento pensions increased 26% during that short time while the Stockton pensions increased by 15%. I think it’s important that the conversation is framed in terms of degrees of pension spiking, as opposed to one city spiked less than the other and, therefore, the city that spiked less is doing a good job. That obviously isn’t the case.

  4. Captain Says:

    And, like always, is it CalPERS that: promoted the 3@50 pension formula, allowed for “the employer pick-up” that the public employee unions took full advantage of with the help of local politicians, approved the 5% pension COLA’s that will eventually drive Stockton’s pension obligations through the roof, allowed Uniform Allowance to be counted as pensionable income, allowed Car Allowance counted as Pensionable income, allowed educational pay to be counted as Pensionable income, allowed for pension increases to be made retroactive, promoted the “final year compensation pension payout” (pensions based on HIGHEST 12 months of earnings), etc…etc…

    All of these perks and many, many more can be found in CalPERS policy. CalPERS has provided their members with a smorgasbord of pension enhancers that have enabled our pension nightmare to exist and fester. Many of these pension enhancers and many more can be found in the “CalPERS List of Optional Benefits“.

  5. spension Says:

    I never said spiking was an `only Stockton’ problem.

    The 3%@50 raise was a bipartisan (unanimous, if I recall) decision of our State Legislature. It represented awful judgement by State Republicans & Democrats. But it is an exaggeration to call a unanimous vote by both houses of our State Legis. `criminal’ or to blame it only on CalPERS (although they are certainly culpable). Innumeracy and financial ignorance is a plague across all levels of our government.

    As for CalPERS domination of pension boards: I believe that decision can be traced back to an initiative passed by California voters. Criminal? I don’t think so. Unwise? Yup. But it is what the voters wanted.

    But spiking should be ended, by all means.

  6. Captain Says:

    “While ruling Stockton eligible for bankruptcy last week, U.S. Bankruptcy Judge Christopher Klein told losing bond insurer attorneys they can continue to pursue a cut in CalPERS debt, mentioning a rollback of pension “spiking.” …Is bankruptcy a way to cut the growing costs of public pensions said by some to be “unsustainable”?”

    “SOME”? I think the “SOME” represents everyone that is paying attention. I find it very disturbing that Stockton can sell 125 million in Pension Obligation Bonds, turn the money over to CalPERs which helps protect the pension payouts of the city employees – including the management that is promoting this plan, and then stiff the BOND holders while leaving CalPERS untouched. I’m guessing the Bond Holders that provided the 125 million would be happy to just get their money back. Unfortunately, the desperate organization known as CalPERS is saying we aren’t about to give that money back, even the principal, because it would make our Stockton funding ratio look even more pathetic than it is, and our members deserve the money.

    “Public pension benefits offered on the date of hire are widely believed to be “vested” rights, protected under contract law by a series of state court decisions, that can only be cut if offset by a new benefit of equal value.”

    Is it just me? Or is this one of the most ridiculous claims ever perpetrated against taxpayers and common sense? I guess if we just fired everyone we could rehire them at a lower rate by claiming their new job represents equal/more value than unemployment benefits. If the above statement regarding “vested rights” is true then we are a bunch of idiots. I don’t believe the above statement is true, and Governor Brown claimed if the public employees don’t agree to reforms “then you can cut their salary. Salary isn’t a vested right”.

    I guess CalPERS and the Public Employee Unions think it is somehow fiscally prudent for an entire state, and all the taxpayers of this apparently bone headed golden paradise, to guarantee new employees, on their first day of work mind you, before anyone even knows if they’re a good worker, that we will guarantee them a pension payout of 3 percent per year, or 2.7%, or 2.5%, times their years of service – based on their highest 12 months of salary (strike that – based on their highest 12 months of salary plus “other” pensionable compensation) which will require the pension fund to average 7.5% returns for the next, maybe, 60 years to fully fund the individuals pension. I wonder how many of the geniuses at CalPERS would use their own money to guarantee returns of 7.5% (net) over a sixty year time frame – and yet that IS what they’re doing with taxpayer funds.

    So the question is, if we need to reduce salary to be able to offset the increased pension & healthcare costs why isn’t it happening. Why can’t we reduce compensation and then increase compensation for reduced pension benefits? I think the answer to my own question is that we have union bargaining groups negotiating with each other while taxpayers are excluded from the process. It seams the only time taxpayers are included in the conversation is when the money being divided by the various public employee unions falls short and they decide a tax increase is the only answer because the pension costs are becoming exorbitant (enter the taxpayer into the discussion), and that effort is rapidly increasing as pension deficits grow. We’ve seen the snow job in the form of prop 30, school bonds & parcel taxes, as well as increased fees for everything imaginable.

    It would be nice if CalPERS stepped up and claimed an appropriate level of responsibility for the mess they’ve helped to create. I think that would go a long way toward setting the tone for what needs to be done. CalPERS needs to end their well-funded campaign of denial and tell their members: we’re all in this together, we were wrong to promote SB 400, and CalPERS members will need to negotiate reductions in their pension payouts.

  7. Captain Says:

    spension Says: “I never said spiking was an `only Stockton’ problem.

    The 3%@50 raise was a bipartisan (unanimous, if I recall) decision of our State Legislature.”

    - good one. And I’m sure you’re aware that CalPers claimed it wouldn’t cost anything for at least a decade while their internal documents warned otherwise. Was that bipartisan vote based on bad information run by the taxpayers? Was the omission of material facts illegal?

    “As for CalPERS domination of pension boards: I believe that decision can be traced back to an initiative passed by California voters. Criminal? I don’t think so. Unwise? Yup. But it is what the voters wanted.”

    - really? When did voters say they wanted that? You mention that you agree the current union dominated pension board is “unwise”. On that we agree. So, why does it seem impossible for our governor/government to rectify the problem? Governor Brown called the current board a problem saying we need more independent pension experts. Why isn’t it happening?

    That was one of Browns 12 point pension reforms that he was using to sell taxpayers on prop 30. What happened?

  8. SeeSaw Says:

    The pension reform legislation was passed before Prop. 30 went to the voters. The reform did not include changing the makeup of the CalPERS Board. Prop. 30, was about tax increases–had nothing to do with reorganizing the CalPERS Board.

  9. Brent Waldrop Says:

    The Stockton Bankruptcy Lie (not broke) http://realitybloger.wordpress.com/2013/04/07/the-stockton-bankruptcy-lie/

  10. spension Says:

    As for CalPERS misrepresentation that the 1999 increases wouldn’t cost a dime… CalPERS was definitely wrong about that. But on the other hand, if I offer you a nice orange bridge leaving San Franciso and ending in Marin County for a bargain price of $10 million, would you believe me?

    Legislators should know how to numerically evaluate CalPERS claims. Voters should only elect legislators who can numerically evaluate such claims. The buck stops with the voters; blaming CalPERS is of course right, they deserve blame. But in America, the private sector has taught everyone that Greed is Good (or God), think only of yourself, and sue anyone who argues otherwise into the poorhouse.

    Enron? Madoff? 50,000 loan officers who illegally altered loan applications to fool Fannie Mae and Freddie Mac? Long Term Capital Management? etc, etc, etc. Greed is Good and Greed is God. CalPERS caught the fever from the US private sector.

    Somebody has got to be honest and careful, and voters gotta do their homework and tell. Maybe legislators should have to pass a bunch of tests before being allowed to run, I don’t know.

    Voters passed Proposition 162 in 1992:

    http://ballotpedia.org/wiki/index.php/California_Proposition_162,_the_%22Pension_Protection_Act%22_(1992)

    calpensions discusses some of the issues:

    http://calpensions.com/category/reforms/

    SB 400 only passed unanimously in the State Senate. 7 did vote against in the Assemply:

    http://calpensions.com/2010/07/16/pension-reform-can-arnold-lift-sb-400/

  11. spension Says:

    Well, here you go, final analysis of SB 400…

    http://www.leginfo.ca.gov/pub/99-00/bill/sen/sb_0351-0400/sb_400_cfa_19990928_142123_sen_floor.html

    You can see the names of the 7 assemblypersons who opposed:

    NOES: Aanestad, Ackerman, Baldwin, Brewer, Kaloogian,
    McClintock, Thompson

    (all Republicans, but lots of Republicans voted yes too).

    No California State Senators voted no, but some did not vote, including Democrats.

  12. Tough Love Says:

    Spension … Everyone on this and all such Boards are in some way “Public Sector employee connected” and they or their families benefit (directly or indirectly) from the granting, increasing, and continuation of these grossly excessive pensions.

    With Public Sector workers earning no less in “cash pay”, there is simply no justification for ANY greater pensions or benefits. Arguably, PAST service accruals should not be reduced to the extent those Past-Service accruals are financially manageable without unacceptable tax increases or service reductions. But to stop digging the hole we are in even deeper, we MUST IMMEDIATELY reduce the pension accrual rate for FUTURE service to a level no greater than what is typically granted Private Sector workers … which is (when taking into account not only the generous DB Plan formula factors, but the young full retirement ages and the inclusion of COLA increases) about 25%-50% of what Public Sector workers are getting today.

  13. John Smith Says:

    Judge Klein has absolutely no legal power to reject Stockton’s plan of adjustment on the ground that Stockton refused to reduce its mandatory employer contribution to CalPERS and/or refused to reduce the “unfunded liability” that actuaries estimate it owes to CalPERS.

    Sections 903 and 904 of the Bankruptcy Code — and the constitutional doctrine of federalism and dual sovereignty incorporated into those statutes and embodied in the 10th Amendment — absolutely prohibit Judge Klein from refusing to confirm Stockton’s plan of adjustment because Stockton didn’t attempt to reduce or modify its state-law mandated financial obligations to CalPERS and the employees and retirees that CalPERS is duty bound to protect.

    Judge Klein will be swiftly slapped down by the Ninth Circuit Court of Appeals and, if necessary, the Supreme Court if he engages in the conduct he intimated that he might take when Stockton submits its plan of adjustment.

    We can all do without Judge Klein’s puffery.

  14. Tough Love Says:

    John Smith, Spoken by very typical Public Sector worker feeding a at the Taxpayers’ pockets.

    Earth to John Klein ……………. there is no money (regardless of what the Courts say). Your pension is toast.

  15. spension Says:

    Well, Tough Love, we’ve had the discussion over pension levels before… I think you overstate the differences between the *average pensions*. See page 24 of http://www.fixpensionsfirst.com/docs/Full_Report.pdf .

    Private pension value (including DC,DB,SS)… about $470,000
    at age 62 Public… ranges from $590,000 (for CalSTRS) to $840,000 (for Local non-safety). Hard to see how you come up with 25-50%.

    Including ***retirement heath care*** does change the picture a lot, but *that is not pension*. And boy, is the health care system a can of worms with the taxpayer paying $1.5 million/year salaries for medical administrators.

    Sure there are exceptional cases in the public system, and we need to fix them. But the Private Sector has way, way worse exceptionally high golden parachutes.

  16. Tough Love Says:

    Spension, I don’t think I exaggerate on the Public vs Private Sector Total Pension differences at all. See here as an example:

    http://unionwatch.org/public-sector-compensation-the-facts-speak-for-themselves/

    I’ve read the study you posted as a link and while I do not have the time to hurt for erroneous analysis, somehow the differences in Total Compensation seem to be considerably understated.

    And SURE the Private sector has excessive salaries …. but the Corporation shareholders (who CHOOSE to be owners) and it’s customers (who CHOOSE to be customers) pay for that excess …. not the Taxpayers … who have no choice in their service providers.

  17. SeeSaw Says:

    Silly analogies! Customers and taxpayers are all one and the same. I have to eat too–I can’t choose not to patronize the grocer–and those supermarket execs make plenty.

  18. Captain Says:

    ((Vallejo officials said they decided not to propose pension cuts after CalPERS threatened a long and costly legal battle. But during a 3½-year bankruptcy a federal judge overturned a Vallejo labor contract, regarded as a precedent-setting first by some….

    Another way to cut CalPERS debt is a private-sector pension tool advocated by the watchdog Little Hoover Commission and others: Allow current workers to keep pension amounts already earned, but give them lower pensions for future service.

    All new hires will get sharply reduced pensions under Gov. Brown’s reform enacted last year, AB 340. Why should current police officers, for example, continue to earn more generous pensions than new officers who are equally in harm‘s way?))

    I agree with the Little Hoover Commission and I’m disgusted with the 98 pound weakling argument coming from our self-proclaimed “independent” governor. The pension reform is beyond weak but the push for the slow train to nowhere, complete with increasing cost and reduced miles of track, and decades worth of subsidies, is right on track.

    With the projected increases in the both cost of the CalPERS payments, along with the projected increases in the CalSTRS payments on behalf of the teachers union, and the projected but grossly underestimated amount of debt and future subsidies required to get the train we don’t need running, how is this state ever going to manage this level debt? I’m not one that thinks all debt is bad – but the amount debt being heaped on the taxpayers back is ridiculous.

    When is common sense going to trump “what the unions want?”

  19. Tough Love Says:

    Captain … The Unions will NEVER “accept” the significant and very much needed common sense pension reforms.

    It must be forced down their throats.

  20. spension Says:

    Well Tough Love, we’ve been through the compensation arguments before. Compensation in the public sector on average is about the same as the private sector… low wage workers are better compensated in the public sector and high wage workers are better compensated in the private sector.

    To do fair comparisons you can’t compare apples and oranges, which that unionwatch article does. Comparing a Ph.D. in the Center for Disease Control to an undocumented laborer picking strawberries in the private sector doesn’t further any rational discussion.

    The Fix Pensions First organization that paid for the study I references is about as fair as it gets.

    Taxpayers subsidize the private sector in the US… witness Enron, Long Term Capital Management, the banking bailout (for $23.7 trillion), and on and on. Cost+ contracts for the medical industry are robbing the taxpayer blind. Is there any democracy in corporations? Directors voted out of office by the taxpayers usually are reappointed. Corruption is just as rampant in the private sector as the public, you just fail to acknowledge it, Tough Love.

    Which does not justify the pension spiking and excessive pensions in the public sector. Both sectors are just about as greedy and licentious as it gets.

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