CalPERS vs. San Bernardino: What do they want?

A federal judge ruled San Bernardino eligible for bankruptcy last week, despite opposition from CalPERS, and then pressed the city to promptly deliver something the big pension fund wanted prior to the ruling: a plan to cut debt and exit bankruptcy.

A sketchy plan issued by San Bernardino last November called for a “fresh start” that would “reamortize CalPERS liability over 30 years,” perhaps in a way that would “realize value of $1.3 million per year starting fiscal year 2014.”

U.S. Bankruptcy Judge Meredith Jury said last week that San Bernardino should prepare an outline or “term sheet” of its bankruptcy exit strategy for mediation to be conducted soon by retired U.S. Bankruptcy Judge Gregg Zive of Reno.

After briefly conferring with city finance officials, an attorney for San Bernardino told the judge the city could have a term sheet ready by the end of the year or early January.

“You are making my (eligibility) ruling look bad,” Judge Jury told attorney Paul Glassman. “You are digging yourself in a hole, and you are going to get a reconsideration. Think some more.”

The judge was told that the city needs a CalPERS valuation due in mid-October, a fiscal 2011-12 city budget audit due in a month, a ruling on a union contract, and the outcome of a November election city council election that includes a recall.

(The seven-member city council could have five new members. Three members are up for re-election. Two members face a recall after a judge ruled last week that signature-gatherers followed proper procedure.

(Also facing a recall is the city attorney, James Penman, regarded by some as divisive and too close to the unions. He twice ran and lost against Mayor Patrick Morris, who is not seeking re-election.)

The judge said the city doesn’t need exact numbers to draft a concept, which is not a final “plan of adjustment” to cut debt. She urged the city not to get hung up on detail, noting for example that “ballpark” CalPERS figures should be available.

“It makes me question whether there ever was an end game,” the judge said.

A CalPERS attorney told the judge the city hired an actuary, Bartel and Associates, which met with CalPERS and should have enough information to make an estimate before the valuation is issued next month.

The city asked for a brief continuance on the term sheet issue. The judge set a phone conference for 11 a.m. tomorrow (Sept. 4).

San Bernardino spending dropped after bankruptcy (April budget packet)

San Bernardino spending dropped after bankruptcy (April budget packet)

The California Public Employees Retirement System became the lone opponent to San Bernardino’s eligibility for bankruptcy when a middle-manager union agreed to a new contract early last month.

After an emergency filing for bankruptcy on Aug. 1 last year automatically stayed debt collection, San Bernardino took the unprecedented step of not paying CalPERS during the last fiscal year.

The city skipped more than $13 million in payments to CalPERS before resuming employer payments from the deficit-ridden general fund when the current fiscal year began in July.

Unlike Stockton and Vallejo, which paid CalPERS while in bankruptcy, San Bernardino proposed that its pension obligations, regarded by many as untouchable under a series of state court decisions, be restructured in federal bankruptcy court.

In a 1½-hour explanation of her ruling, Jury addressed the main CalPERS contentions that the city created a crisis, failed to negotiate with creditors, did not act in good faith, has no restructuring plan and deliberately withheld key financial information.

“I don’t believe anybody in this courtroom seriously thought the city was not insolvent,” said the judge.

San Bernardino officials, citing years of faulty management, said a new city manager and finance officer discovered a large deficit last year. The city said an emergency bankruptcy filing was needed to have enough cash to meet the August payroll.

Jury seemed puzzled about what CalPERS expected to gain by opposing San Bernardino’s eligibility for bankruptcy. She said the only apparent alternative is dissolving the city.

“How does that help CalPERS if the employees aren’t paid?” she said.

An attorney for CalPERS, Michael Gearin, said ruling San Bernardino eligible for bankruptcy is a “dangerous precedent” that might encourage other debtors to create a “self-inflicted crisis” and file for bankruptcy without pursuing alternatives.

Gearin

Gearin

“We don’t think that’s a proper precedent,” Gearin told the judge. “We think it’s bad policy, and that’s why CalPERS continues to object to eligibility.”

The San Bernardino city attorney facing recall, James Penman, said in a note read to the judge that city officials would not put themselves through the “daily recurring pain” and “public outcry” resulting from bankruptcy if it was not necessary.

“It is an emergency room, not a health spa,” said Penman’s note.

An attorney for bond insurer Ambac, David Dubrow, told the judge by phone his firm considered opposing eligibility but concluded that San Bernardino was an “outlier” that could pass the crucial insolvency test.

Dubrow

Dubrow

Since the judge posed the question, Dubrow said he would offer his theory about what CalPERS expected to gain if the judge dismissed the San Bernardino bankruptcy: “tremendous leverage.”

If San Bernardino was not in bankruptcy, Dubrow said, the city pension plan could be terminated, allowing CalPERS to place a lien on city assets. The judge blocked a CalPERS attempt to sue San Bernardino for payment in state court.

Last April the CalPERS board approved a proposal to sponsor legislation placing a “present lien” on local government assets without terminating pension plans. The bill is not expected to be introduced until next year.

Bond insurers and pension systems can be adversaries in the current wave of bankruptcies. In Vallejo, bond payments were cut. Council members said they decided not to try to cut pensions after CalPERS threatened an expensive legal battle.

Stockton wants to cut bond debt but not pensions, saying they are needed for a competitive workforce. Two bond insurers, Assured Guaranty and National Public Finance Guarantee, argue that the plan to cut bond debt but not pension debt is unfair.

Ambac agreed to cut Stockton debt payments for a housing project. If Assured and National do not reach a similar agreement, the judge has said he may rule on the pension-bond fairness issue after Stockton submits a “plan of adjustment” later this month.

After Judge Jury’s ruling on San Bernardino eligibility last week, CalPERS said it’s “considering its options for appeals” but will “continue to participate in the bankruptcy process in good faith.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 3 Sep 13

23 Responses to “CalPERS vs. San Bernardino: What do they want?”

  1. Tough Love Says:

    A bankruptcy Court ruling that pensions (of both retirees and the vested accruals of actives) CAN indeed be reduced is important, because it is the ONLY thing that MIGHT encourage the very greedy Public Sector Unions/workers (with pensions multiples greater …even as a % of pay … than the Private Sector taxpayers who fund 80-90% of the total cost) to even CONSIDER financially material reductions in the pension accrual rate for future service of CURRENT workers.

    At a MINIMUM we need to immediately stop digging the financial hole we are in deeper by layering on even MORE unaffordable pensions accruals via a continuation of the current grossly excessive Public Sector pensions formulas and favorable provisions (e.g., early full retirement ages, COLAs, under-priced early retirements, VERY liberal definitions of “pensionable compensation”, allowing the spiking of final pensionable pay, absurdly easy-to-meet “disability” retirements, etc.etc,etc.)

  2. SeeSaw Says:

    Pay your pension bills, SB. Then you can work on your readjustment plan.

  3. SeeSaw Says:

    CA has passed and enacted a pension reform law, TL. If you want to go farther than that, you need a revision of the CA Constitution. Do you want to be the first in providing the funding needed to put an initiative before the voters of CA, to take away current pensions and freeze current accruals, going forward?. If you don’t, then you need to keep quiet–especially since you are not even a resident of CA.

  4. Mike Genest Says:

    Ed, you’re doing a great service with this blog. Thank you.

  5. Tough Love Says:

    Seesaw, The “reform” CA has passed is a financial “joke”.

    Perhaps, if/when Detroit’s Bankruptcy is settled with Court approval for pension reductions (which, being a federal Court, would apply in all States), the Public Sector Unions in Cities teetering on insolvency will see the writing on the wall and agree to material pension reductions cuts for CURRENT workers, rather than losing MUCH MORE (and especially for retirees and senior members) via a Bankruptcy proceeding.

  6. Guess Who Says:

    The reformed passed by CA was no joke. It consists of a full 1/3 cut to the top end of the safety retirement for new hires (1/3 by actuarial standards). It places a 50% burden (starting in 2015 I believe) of funding on the employees, where it is about 25% currently at the state level. There are other changes, but these two alone will save a great many dollars going forward, and over time will increase the funded ratio of CalPers. To say these reforms (which are some of the most significant nation wide) are a ‘joke’, shows a true lack of understanding of the situation, or a sinister alternative motive – or both. We have all seen TL’s posts, and know him for what he is – a troll.

  7. Gil Franco Says:

    I have question for you, Mr. Mendel, or anyone else who can answer: Does the bankruptcy court really need to decide whether payments can be cut to pensioners? It seems to me that court can just adjust San Bernadino’s payments to Calpers without speaking to whether or not Calpers must, in turn, cut payments to pensioners. Calpers could then decide whether it wants to eat the deficiency, spread it among its payees, or cut San Bernadino’s retirees’ pensions. Am I missing something?

  8. Tough Love Says:

    Dear “Guess Who”, YES, the reforms WERE a “joke” ….because of the word “new” in you first sentence. Changes that only apply to “new” workers will have no MATERIAL financial impact for decades.

    You (or a family member) are CLEARLY a Public Sector worker or retiree riding this grossly excessive pension & benefit gravy train, and don’t want it derailed.

    I suggest you develop a “Plan B” for when (not IF) your pension Plan goes broke.

  9. Tough Love Says:

    Gil Franco, I’m not a Bankruptcy attorney and I too have wondered how this will shake out. There appears to be very little history and case law (on municipal bankruptcies) and know one knows for sure,

    What HAS been posted numerous times is that Federal Bankruptcy Judges cannot force a Bankrupt City to do specific things (as can a judge in a Private Sector Bankruptcy) and basically encourages the many creditors and the Bankrupt City to develop and present a “plan” to the Court than is “fair” to all parties …. including the ongoing ability of the City to function in a reasonable and safe manner. What the judge CAN do is refuse to approve a “plan” that the judge believes is unfair to specific creditors. Without the judge’s approval, the City cannot exit Bankruptcy.

    As an example, while the City of Stockton, CA has indicated it only wants to cut Bond payments, but not pensions, the judge has hinted that he might find that unfair and unacceptable.

    Your other question as to the possible actions of CALPERS (should payments to it by the Bankrupt city be wiped out or reduced by the Court) is even more up-in-the-air. Clearly CALPERS has the resources to absorb non-payment from one or several cities w/o any near-term impact on it’s (already very questionable) ability to meet promised pensions, but passing on the pension costs of one city (whose debt has been wiped clean or reduced by the Court) to OTHER Cites so that the Bankrupt City’s workers will still get unreduced pensions, seems to be both an attempt to nullify the Court’s decision, and an abuse of the Taxpayers (by asking the the Taxpayers of Cities A,B,C, etc., … to pay for the pension costs of workers in the Bankrupt City)

    Of course, abusing Taxpayers would be nothing new for CalPERS.

  10. SeeSaw Says:

    No Gil Frano, the ball is in the debtor’s court. In Chapter 9, the Court can only approve or disapprove of SB’s recovery plan. San Bernardino needs to do what it know is right, and make its payments to CalPERS.

  11. Captain Says:

    SeeSaw Says: “No Gil Frano, the ball is in the debtor’s court. In Chapter 9, the Court can only approve or disapprove of SB’s recovery plan. San Bernardino needs to do what it know is right, and make its payments to CalPERS”

    SeeSaw, the more I read your comments the more convinced I am you are anything BUT a 70 year old lady on a meager pension. I’m sure the truth is you are either the fool david low(e), or some goofy character that will defend CalPERS, O.J., or any other criminal organization or person.

    Your logic, like always SeeSaw, is lacking.

  12. SeeSaw Says:

    CalPERS cannot pass the pension costs of one city on to any other city. Each CalPERS member is a separate entity under that DB plan.

  13. Captain Says:

    CalPERS vs. San Bernardino: What do they (CALPERS) want?

    “An attorney for bond insurer Ambac, David Dubrow, told the judge by phone his firm considered opposing eligibility but concluded that San Bernardino was an “outlier” that could pass the crucial insolvency test.

    Since the judge posed the question, Dubrow said he would offer his theory about what CalPERS expected to gain if the judge dismissed the San Bernardino bankruptcy: “tremendous leverage.””

    – So a corrupt organization known as CalPERS that has brought us SB 400 along with promises of zero rate increases for a decade – at least, based on their professional financial projections of the DOW hitting 25,000 by 2010, while they were involved in the “Pay to Play” scandal, the under priced , by as much as 30%, cost of buying service credits taxpayer rip-off, the expansion of every pay category being included as pensionable income — and, last but not least – THE CONSTANT AND CONTINUING EFFORT OF CALPERS SENIOR MANAGEMET AND THEIR CORRUPT BOARD TO CONTINUE THEIR MISSION OF SABOTAGING ANY and ALL EFFORTS TOWARDS REFORMING THEIR OWN FAILED PENSION PLAN – for the sake of their own “TREMENDOUS LEVERAGE“.

    Here’s where it gets good: “If San Bernardino was not in bankruptcy, Dubrow said, the city pension plan could be terminated, allowing CalPERS to place a lien on city assets. The judge blocked a CalPERS attempt to sue San Bernardino for payment in state court.”

    – of course CalPERS doesn’t want the plan to be terminated because their members know they have a great deal and would be furious if CalPERS eliminated their pension plan, even if there were a claim against city /taxpayer assets. But, CalPERS, being the good (EVIL) citizen is sponsoring new legislation to ensure their ability to rape the poor taxpayers. How does CalPERS plan to inflict even more post SB 400:

    “Last April the CalPERS board approved a proposal to sponsor legislation placing a “present lien” on local government assets without terminating pension plans. The bill is not expected to be introduced until next year.”

    Essentially this CalPERS plan is designed to allow CalPERS to place a lien on city assets without closing the pension plan, which is a current requirement put in place to end the CalPERS/ City relationship of those which couldn’t afford to pay. CalPERS is now saying we don’t want to end that relationship of our members if we can place a lien on city assets. Basically, they want to extract every penny from their host city in order to satisfy the unsustainable pension formulas they’ve created and the subsequent payouts their lies have falsely promised to their members.

    CalPERS continues to push legislation which continues to place additional strain on taxpayers, city budgets, school budgets, water district budgets, and, again – taxpayers.

    Back to the top: CalPERS vs. San Bernardino: What do they (CALPERS) want? The answer is: THEY WANT THE ASSETS OF YOUR CITY!

  14. Captain Says:

    SeeSaw Says: “CalPERS cannot pass the pension costs of one city on to any other city. Each CalPERS member is a separate entity under that DB plan.”

    – not entirely true under the “pooled” plans, teeter-totter.

  15. SeeSaw Says:

    The plans of the respective members are not pooled–they are separate. How about putting forth some facts to go with your usual opinionated hate-vitriol!

  16. SeeSaw Says:

    I never said my pension is “meager”, Captain–those are your words. My pension is modest–far from membership in the 100+ club. A meager pension is the CalPERS average of $26,000 and lower.

    How are you being raped by CalPERS? What amount of money are you personally spending every year to support CalPERS?

    My personal property taxes are $495/yr on an old 1955 tract house, and the state income tax liability of my spouse and me is $1850/yr. There are no line-item amounts on our tax bills allocating certain amounts to pensions. All, a far-cry from being abused by the local and state taxing authorities!

    How many CalPERS Board meetings have you attended, and how often do you read the information provided on the CalPERS website? I bet you don’t look–you can’t stand to view the facts–it would ruin your continuing cry-fest.

  17. Guess Who Says:

    Wow!! TL replied in CAPS, and as we all know – anything on the intraweb that is in CAPS must be true.

    TL, my pension (and my wife’s) is under no threat for at least 15 years. So as to you’re suggestion that we have a plan ‘B’ – it is appreciated, but I will file it with the rest of you’re ‘suggestions’.

    Jerry Brown and crew have done a great job in curbing future retirement costs with the legislation that has already been passed. What needs to be addressed at this point is on the county/city level. Jerry Brown and company have already passed anti-spiking reform that some local governments have chosen to ignore. Pension spiking is where ‘reform’ needs to take place, as it is an unethical violation of the taxpayer. In addition, ‘disability’ retirements need to all need to be reevaluated. Those who have paid into the system, not spiked their pensions, not played the disability game – played by the rules essentially are not the problem.

    Going to work now in my retired annuitant position to double dip a bit. Oh, how sweet it is.

  18. Tough Love Says:

    Guess Who, I guess we’ll just have to agree-to-disagree whether Jerry Brown’s pension changes are ‘”a great job” as you say, or a financial “joke” as I say.

    I suggest that you keep your focus on the outcome of Detroit’s Bankruptcy, as the decisions of that Case/Court will play a big roll in how soon many of CA’s Pension Plans go belly up as their city sponsors look to bankruptcy to get this financial noose off their necks.

  19. SeeSaw Says:

    Guess Who, most cities in CA are covered by CalPERS and fall under JB’s new pension reform. They follow the same rules set by CalPERS as does the State: Pensions are calculated on base salary only–no spiking. I am still not sure how the County plans fit under the new reform legislation. All the general law municipalities in CA have been given five years to negotiate the employees’ personal pension shares; some of them may go along now–for others, it might take some or all of the five years. It is not quite fair to accuse the cities of ignoring the State’s ultimatum.

  20. Captain Says:

    SeeSaw Says: “The plans of the respective members are not pooled–they are separate.”

    Yes, I know. But many city plans are pooled -conjoined if you will, and those pooled plans are not separate. I was responding to your claim:

    ” SeeSaw Says: “CalPERS cannot pass the pension costs of one city on to any other city. Each CalPERS member is a separate entity under that DB plan.”

    – That isn’t true. Pooled plan members (cities) can indeed inflict pain on othr cities. Just one more flaw, of many, in the CalPERS system.

  21. Captain Says:

    SeeSaw Says: “Guess Who, most cities in CA are covered by CalPERS and fall under JB’s new pension reform. They follow the same rules set by CalPERS as does the State: Pensions are calculated on base salary only–no spiking.”

    That is just more bull! Just because CalPERS doesn’t allow the same amount of pension spiking as their counterparts in the County/Large City plans doesn’t mean they, CalPERS, are not guilty of allowing pension spiking. CalPERS allows pension spiking in many, many ways.

    The CalPERS sponsored SB 400, complete with the retroactive pension benefits, may be the most blatant pension spiking scheme to date.

  22. Tough Love Says:

    Captain, While it would be nice if extraordinary growth in the investment markets “solved” the underfunded liability problems without incremental Taxpayer contributions, that’s not likely to happen. Unfortunately, in many cities (and perhaps some States) insolvency will necessitate Public Sector pension (and retiree healthcare) reductions.

    If/when that occurs place, I envision the retroactive pension enhancement being at or very near the top of the list of givebacks.

  23. SeeSaw Says:

    Well if I could have added my unused vac and sick-time to my salary at retirement time, that would have been nice–but CalPERS does not allow it. If you want to put your own talking-points across you need to provide examples and documentation. I would like to know if I missed something that would have benefitted me.

    CalPERS sponsored SB 400 is spilt milk. It was an error in judgment, based on the assumption that the good times would continue to roll. CalPERS did not know that the whole world would collapse financially in September, 2008, and neither did anybody else, except the real perpetrators on Wall Street.

    The pension reform bill abolishes the 3% at 50 for future safety hires. If you want to change that, retroactively, you have to pass an initiative, and you would be going to your own grave before it ever gets out of court. Happy whining!!

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