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.
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 29 Oct 12
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San Bernardino Pre-Pendency Plan, 29 Aug 12, p. 5
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Calpensions 
October 29, 2012 at 2:12 pm
Ed, just wanted you to know that I’m a regular reader and I find your blog very informative and helpful. Good work
October 29, 2012 at 3:57 pm
I notice that San Bernardino has a parcel tax just to pay pensions. How is it that government can impose a fee just to benefit government. We’re doing it for the bennies. I also find it interesting that one government group is fighting with another government group in another government jurisdiction-the court over dough. This has all the seeds for a secession movement as why will local taxpayers and local governments want to be plundered by the state government to protect state government’s bennies. Local governments go bankrupt from bigger central government. I just laugh and it is an election year that voters actually listen to these politicians’ phony promises of something for nothing that is actually making the average Joe poorer. The road to misery is paved with politicians promising something for nothing. What’s worse is voters believe them.
October 29, 2012 at 4:15 pm
Prior to the State’s abolishment of the Redevelopment agencies, CA had three municipal bankruptcies over the past 60 year-period. Now three have filed in the past six months, with more looming. The removal of Redevelopment couldn’t be a factor with all these current and looming, local bankruptcies, could it? DUH!
October 29, 2012 at 4:43 pm
Buck, that parcel tax had to have been passed by the landowners themselves. Prior to the 2008 “crash”, it was not yet widely known that we were headed for the cliff. There are a lot of factors in the mix, including financial mismanagement, but the abolishment of Redevelopment is obviously a very salient one. The City of Upland, with an approximate population of 65,000 residents was paying its CM $460,000/yr. prior to suffering its own financial difficulties in 2011. The practice of paying CM’s and other high level managers obscene salaries is wide-spread and certainly one factor, in these financial troubles for local govenments. Those who hate unions don’t want to look–they are covering their eyes, ears, and mouths–it would pain them too much to admit that 90+ percent of these high-level managers, in CA’s local governments, are not members of unions, and they hate unions too.
October 29, 2012 at 5:47 pm
This is generational theft..pure and simple. This is not just a moral crisis of the first order, this is the moral crisis of our age. We are collectively endangering our children’s economic futures without giving them the slightest say in the matter. We are doing this systematically and with malice aforethought. Worst of all, we are pretending not to notice. Shame on the unions and their crony toadie union politicians that have sacrificed our children’s future by consuming future budgets for the next 30 years. Los Angeles is predicted to be BANKRUPT by 2014, San Francisco by 2016, Marin County – 5000 current and retired employees and the BOS allowed them to run up over $3 billion in unfunded obligations (that’s $600k per retiree and employees..most for the latter). Now we see the plundering by these union fiscal thugs throughout Orange County. It’s a ponzi scheme worthy of making Madoff blush. Predictably, entire budgets are swept to pay the new $100k – 300k for life for folks retiring in their 50’s and on the take for 20 – 35 years plus free medical (that does a millionaire make and does not represent “middle class”) these unions have created the new elite – the new bourgeois – by clearly gaming and bribing the system to enrich themselves over our children and future. Pathetic….and shame on the politicians for enabling them and accepting public employee union bribes. The absolute power these unions have over all of us is frightening…for me, its simply stunning that these pirates have gamed this system so well, that even with bright flashlights of truth and excesses, they don’t blink, let alone run. They believe this is their right…they are worth it…and with a straight face tell taxpayers “good luck trying to change the rules…we made em.” This Counties, cities, many States and perhaps our Country, have been hijacked by these government
employees who, sadly, supposedly work(ed) for us. They don’t…our Legislators, City Councils and Governor (and President), work for them…..and the credit card bills they have racked up…is undeniable evidence that. Today, tragically, they are right. God help us and we owe an apology to our children for letting this fiscal abuse of the next generation by 4% (public employee unions) of the US population occur.
October 29, 2012 at 7:37 pm
You prove what I just posted, Marincountyman.
How many in-person speeches have you made with this pre-prepared, written diatribe that you have already, in the past, sent to hundreds of publications?
October 29, 2012 at 10:53 pm
just curious how these cities are justifying taking employee contributions and not forwarding them to PERS.
October 30, 2012 at 2:35 am
In response to Mandy Barre Says …
Since all city revenue is commingled, it’s likely that part of their salaries are being paid for with their own pension payments.
Hows THAT for a very minor, but interesting comeuppance for the greed exhibited by the Unions and their members.
October 30, 2012 at 5:57 am
Comingled? I don’t think so. Incoming revenue is banked and documented, on paper, to the, respective, accounts, for which it was budgeted. If a troubled city found itself short of normally expected revenue, and it could not make the payroll, it might have had to request a transfer of funds from one account to another, in order to cover that payroll. It would be on the Agenda and posted publicly, prior to official authorization. They don’t just jump into a community pot and grab what they need. If they didn’t make the required pension payments, they will be explaining why, in the bankruptcy process.
October 30, 2012 at 1:03 pm
SeeSaw, I do NOT know anything about the specifics of San Bernardino, but I do know that, under federal law, all contributions to a qualified pension fund are technically employer contributions. The “employee contributions”, technically are pay give backs to the employer in recognition of the employer’s costs to make the required contributions. While I’m not sure how any specific accounting systems handles these funds, I am pretty sure of the above, which could explain how they are able to withhold 100 percent of the required payment.
October 30, 2012 at 6:27 pm
MG, sure. I know you are a principal in the governmental/political process–I bet you know far more about the specifics of SB, than you say. (I recall that my own 457b account, that consisted of funds from my own paycheck, remained as the property of my employer, as long as I was employed. So, agreeing that employee payments for CalPERS remain in the hands of the employer, until they are sent to CalPERS and the employee is retired, is no stretch. I also went through the bankruptcy, in the 80’s, of my employer’s deferred comp provider–my account was frozen and tied up, without interest, for three years, until the banruptcy process was concluded.)
I have a problem with the word, “commingle”. I worked on my department’s budget in the 80’s when some state proposition was interpreted that we had to figure our own bennies. There is a separate account for everything–the money is not simply put into one pot and drawn on as any particular need arises. The CalPERS portion is a percentage of the base salary, and has to be budgeted for and held in a separate account, just like the salaries. Of course it is the obligation of the entity to account for those funds properly, be they come from expected revenue or from the pay checks of the employees, and send the required payments to CalPERS. It would be simple, if the expected amounts of revenue came in. (From my perspective, the salaries and CalPERS payments should be first, greedy one that I am.)
Funds received from the member-entities by CalPERS are not just taken by CalPERS and dropped into a community-pot either. There is an account for each respective, employee-member–I received a yearly statement for my own CalPERS account, detailing the separate employer and employee contributions.
As far as SB is concerned (I was not employed there, but I reside in the general area) it does not take much thinking to know what happened. The housing bust,resulting in double-digit unemployment, and the cherry topping of the loss of Redevelopment brought SB to its knees. When it had all that money from the property taxes on those $400,000 houses that the mortagage brokers and banks unloaded on their unsophistcated, vicitim-purchasers, there was enough money available–and, of course the bulk of the money went to the CM’s and other high level managers–not those “greedy” rank and file union workers. Then the dam broke, and SB had to start robbing Peter to pay Paul. I’m sure that its all accounted for somewhere, and there will be a lengthy process to straignten it all out.
Now, we have those who sit in their ivory towers from up there in NJ and pontificate about us down in CA, thinking that they know each and every one of us personally and see our motives clearly. They are like bird watchers, waiting to see if the worst will happen to others, and if they will then get to cuddle them all up in their own misery.
October 30, 2012 at 10:10 pm
Quoting SeeSaw …” (From my perspective, the salaries and CalPERS payments should be first, greedy one that I am.) ”
Honesty IS the best policy.
October 30, 2012 at 10:16 pm
Quoting SeeSaw …” When it had all that money from the property taxes on those $400,000 houses that the mortagage brokers and banks unloaded on their unsophisticated, victim-purchasers”
Oh please …. Let’s restate that more appropriately:
“when the borrowers acted as irresponsible brain-dead idiots by borrowing FAR FAR more than they could reasonably repay …”
No SeeSaw, it’s not NOT always SOMEONE ELSE’s fault … one needs to take responsibility for the own decisions and actions.
October 30, 2012 at 11:55 pm
That’s right TL–the “smart” people–the liar loaners, knew the buyers were dumb, and they, the “smart” people, took full advantage.
October 30, 2012 at 11:59 pm
It was “Tongue-in-Cheek”, TL.
October 31, 2012 at 2:19 am
SeSaw, Thanks for explaining that to me.
November 4, 2012 at 10:26 pm
Yup, ast Tough Love says… those responsible for voting in the politicians who allowed these high pensions must stand up and take responsibility… and that is, of course, the voters themselves, which is where the buck stops… can’t blame greedy unions or greedy private sector executives, who are equally greedy. The voters did it, pure and simple.
November 4, 2012 at 11:19 pm
spension, It’s interest how you are telling me what I said. I didn’t recall saying that, and reviewing my comments confirms that.
Your quite the contrary individual. Have you seen you Psychiatrist lately (time for a visit)?
November 5, 2012 at 12:21 am
I’m sorry but aren’t people entitled to a decent wage? The erosion of our middle class is near complete save for our union members of all stripes! When the middle class is lifted up, they spend. When they spend, business prospers as does real estate! But they have to be able to afford to spend.
November 5, 2012 at 5:21 am
Yes Mandy Barre says, people are entitled to a decent wage, but PUBLIC sector Unions are a special case and need special watching because they ROUTINELY bribe our elected officials with campaign contributions and election support in exchange for favorable votes on pay, pensions and benefits, resulting UNNECESSARILY in far greater “Total Compensation” (cash pay + pensions + benefits) than their Private Sector counterparts.
That excess need to stop and be reversed via REDUCTIONS to promised pensions … and for CURRENT, not just new workers.
Sorry, but Taxpayers are fed up and greed HAS consequences.
November 6, 2012 at 1:33 am
“one needs to take responsibility for the own decisions and actions.”… quoting Tough Love, October 30, 2012 at 10:16 pm.
That includes: the voters who voted in the politicians who made the pension deals that are now outrageously expensive. Of course, Tough Love is quite contradictory in his own thinking… he wants to exonerate the voter and blame the whole problem on Labor Union graft & corruption. As if Private Sector money was not equally dirty and influential (without a vote of the stockholders to allocate those funds to political donations).
November 6, 2012 at 6:13 am
Spension …you took that quite way out of context.
That comment was referring those who borrowed far more than they could reasonably repay. Just because someone (who has no skin in the game … i.e., won’t incur a loss if the mortgage isn’t paid) is willing to lend you the money doesn’t mean that it makes sense for you to take it.
So how many people have you fought with today ?
November 8, 2012 at 5:06 am
Thanks for libeling public unions by accusing them of the crimes of bribery- tough love- Some people just are too wild on this blog. Sad.
November 9, 2012 at 5:14 pm
So, Tough Love, you don’t think the voter is responsible for their vote?
Would be so refreshing if you cut out the non-sequiturs.