The city of Vallejo’s groundbreaking attempt to use bankruptcy to overturn expensive labor contracts may include pension and retiree health contracts with CalPERS.
The list of creditors holding the “20 largest unsecured claims” issued by Vallejo when it declared bankruptcy last May was topped by the California Public Employees Retirement System — $135 million for retiree health care and $84 million for pensions.
The city has not formally proposed a change in retiree benefits. But Vallejo officials have said publicly that they want to negotiate a “long-term solution” with the public employee unions.
An attorney for the city’s retirees, James Paul, said in a filing with the U.S. Banruptcy Court last month that the city “has indicated its intent” to modify retiree health benefits in talks with unions and the retirees committee.
“In addition, the city took unilateral action in March 2008 to change the amortization period for its unfunded pension liabilities under CalPERS, which has the effect of deferring funding of vested pension benefits,” Paul wrote.
The attorney added in a footnote that the action by the city before declaring bankruptcy “may have violated the terms of its collective bargaining agreements and California law protecting retirees’ pension benefits.”
A U.S. Bankruptcy Court judge in Sacramento, Michael McManus, ruled in September that Vallejo is eligible for Chapter 9 bankruptcy. The judge has scheduled a hearing Feb. 3 on the city’s motion to overturn its labor contracts.
Meanwhile, an appellate panel has agreed to hear an appeal of the judge’s September eligibility ruling filed by three Vallejo public employee unions representing police, firemen and electrical workers.
Vallejo, a waterfront suburb of 120,000 on the San Francisco Bay, was hit by the closure of Mare Island Naval Shipyard in 1996. More recently, the closure of a Wal-Mart, the sale of Six Flags Marine World and other factors have hurt tax revenue.
The city says it has cut spending on many programs, has few revenue- raising options, got little salary concessions from unions, and is prevented by law from dipping into $136 million in special funds designated for transportation and other programs.
Judge McManus accepted the city’s claim of a $17 million deficit in a $95 million general fund budget for the fiscal year that began last July. Total expected general fund revenue, $77.9 million, is said to be less than the $79.4 million labor cost.
The judge was not persuaded by the arguments of the union representative, Roger Mialocq of Harvey M. Rose Associates, who contended that the city could raise $3.1 million in new revenue and had overstated labor costs by about $5 million.
“Mr. Mialocq damaged his credibility with the court when he admitted that, after initially declining to assist the unions, he took the assignment because he felt that the city’s bankruptcy petition could harm his other clients,” McManus wrote.
A statewide labor organization, the California Professional Firefighters, warns on its web site that Vallejo’s unprecedented attempt to overturn lawfully negotiated labor contracts threatens all collective bargaining.
“If allowed to stand, Vallejo’s attack on its own employees would send shock waves throughout the labor movement, setting the stage for a cascade of tactical ‘bankruptcies,’ all filed with the sole purpose of reneging on their employees,” says the firefighter web site.
Labor groups outside Vallejo are being asked to contribute money to the legal fight against using bankruptcy to overturn labor contracts. In contract talks, some local governments are already said to be threatening to “do a Vallejo,” declare bankruptcy.
Labor-friendly CalPERS has taken a position in some local government contract disputes — seeking permission, for example, to file a friend-of-the-court brief last year when Orange County tried to invalidate a 2001 contract with deputy sheriffs.
But CalPERS has shown less direct support for the Vallejo labor unions in their contract dispute. After looking at the issue, the big pension fund did not file an objection to Vallejo’s bankruptcy.
An e-mail from a CalPERS attorney, Steven Felderstein, filed in Bankruptcy Court last June said CalPERS was considering whether to join the unions in “objecting to Vallejo’s Chapter 9 eligibility” or file an objection of its own.
“At this point, CalPERS does not have sufficient information to determine that Vallejo is not eligible to file a Chapter 9 bankruptcy case,” Felderstein said in an e-mail sent to a retiree who was concerned that his benefits might be in jeopardy.
Last August, Vallejo acknowledged that CalPERS is an administrator of retiree health, not a creditor. The city amended its 20 largest creditors list, replacing CalPERS with individuals holding a claim to $135 million in future retiree health benefits.
The state and most local governments, like Vallejo, have not set aside money to pay for health care promised retirees in the future. A governor’s commission reported last year that the unfunded retiree health care obligation is at least $118 billion over 30 years.
But CalPERS remains second on Vallejo’s creditor list with $84 million owed for future pension benefits. Members make payments to CalPERS, which has a large investment portfolio that has paid three-quarters of annual pension costs in the past.
“Vallejo has substantial unfunded and under-funded obligations to CalPERS in the approximate amount of $84 million dollars,” Felderstein said in the June e-mail. “As such, CalPERS is a creditor of Vallejo and must protect its own claim in Vallejo’s Chapter 9 case.”
A CalPERS filing in Bankruptcy Court last month said CalPERS is not a party to the city’s contracts with the labor unions. Instead, CalPERS has its own separate contracts with the city for pension and retiree health benefits.
CalPERS said its contracts with the cities can only be terminated by a legal process that includes, among other things, advance notice — a year for pensions and 60 days for retiree health.
And so, CalPERS argued, even if the city’s contracts with the labor unions are overturned in Bankruptcy Court, the CalPERS contracts with the city would remain in force.
“For the reasons stated above, rejection of the Collective Bargaining Agreements by the city, if authorized by the court, cannot operate as an implicit rejection of the CalPERS contracts,” Felderstein wrote in the filing.
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 15 Jan 09