San Bernardino may have to pay full pension tab

RIVERSIDE — A federal judge last week rejected a CalPERS request to sue bankrupt San Bernardino for a growing unpaid bill, but gave preliminary support to the argument that the bill must be paid in full before the city can leave bankruptcy.

The widely watched question of whether the bankruptcy will reduce pensions promised retirees or payments made by the city to CalPERS may now turn on the ability of the city to pay.

U.S. Bankruptcy Judge Meredith Jury agreed to a 60-day discovery period sought by CalPERS to probe city finances. City officials said they plan to hire a half-dozen persons to help a skeleton staff provide information to the big pension system.

The judge rejected a CalPERS motion to lift the automatic stay on debt collection imposed when San Bernardino filed for bankruptcy Aug. 1. She said employee pay would be threatened and the attempt to reorganize under bankruptcy law undercut.

Jury said she would be “highly disappointed” if CalPERS sued the city in state court, citing an appeals court decision giving bankruptcy court precedence. A CalPERS lawyer replied that an “end run” is unlikely but left the option open.

The judge indefinitely delayed a ruling on whether San Bernardino is eligible for bankruptcy, a step that would give the city more leverage in negotiations with creditors. She urged the city to begin thinking about an “end game” plan now.

In an emergency filing for bankruptcy, the city said debt deferral was needed to continue meeting payroll. Unlike in the Stockton and Vallejo bankruptcies, San Bernardino stopped making payments to CalPERS.

The city’s unpaid bill to CalPERS, growing at $1.7 million a month, is now more than $8 million. The debt is expected to reach $13 million to $19 million by the end of the fiscal year in June, depending on whether unions agree to pay more toward pensions.

San Bernardino contends that a new city manager and finance officer hired last spring discovered a $19 million general fund cash deficit. The city blames years of overspending, faulty bookkeeping, a weak local economy and the housing bust.

A CalPERS attorney, Michael Gearin, told the court Friday the city has an unexplained $14.7 million cash surplus. He argued that the city could pay its CalPERS bill if ordered to do so by a state court.

In the Vallejo bankruptcy, unions waged a lengthy and unsuccessful court battle to dip into restricted special funds to help close a general fund deficit. San Bernardino already has borrowed $15 million from special funds and is proposing to defer repayment.

The judge told an attorney for the city, Paul Glassman, during a four-hour hearing that CalPERS apparently hopes to discover a “pot of gold” stashed among the city special funds.

Glassman said all of the special fund information is on the city website, except for limited access to the water department. He said the city has borrowed from special funds to survive but cannot simply “raid” them.

CalPERS said the city only produced about a dozen of the more than 50 financial documents requested. During a hearing recess, CalPERS and the city were unable to agree on a discovery plan. They will try again before the next court hearing Jan. 22.

Two other points raised by CalPERS attorneys may have helped persuade the judge, initially concerned about delaying tactics, to agree to a 60-day discovery period for records going back about one year.

A San Bernardino consultant e-mailed a Stockton official about the 90-day mediation with creditors used by Stockton under a new state law before filing for bankruptcy, versus the emergency bypass of mediation chosen by San Bernardino.

A Reuters news story said the city paid $2 million for unused vacation and sick leave shortly before filing for bankruptcy, an action CalPERS said was preferential to insiders. The city said it followed the law as its plight caused a wave of retirements.

San Bernardino Mayor Patrick Morris, left, and City Attorney James Penman talk to reporters

San Bernardino Mayor Patrick Morris, left, and City Attorney James Penman talk to reporters

In a typical bankruptcy, negotiations with creditors reduce debt. Bond insurers are opposing Stockton’s eligibility for bankruptcy, arguing among other things they are being treated unfairly because the city is not trying to reduce its large CalPERS debt.

CalPERS is contending in the San Bernardino case that the unpaid pension bill is not typical debt because it’s being run up after the city filed a petition for bankruptcy, protected by the automatic stay on debt collection.

The pension bill should be treated as an operating or “administrative” expense that must be paid in full before exiting bankruptcy, CalPERS argues, similar to a requirement in the private sector aimed at preventing erosion of the value of properties in bankruptcy.

The judge said the “800-pound gorilla in the room” is whether there are priority administrative expenses (in this case the pension bill) in a municipal bankruptcy that must be paid in full before the city leaves bankruptcy.

“My preliminary thoughts on that matter is that there are and they do,” said Jury.

The judge said it’s a “staggering concept” if the city is eligible for bankruptcy and tries to put together a plan to emerge. She said it would mean that CalPERS, even if the city debt is deferred, would not be treated as just another creditor.

Before making a decision on the administrative expenses issue, the judge said she wants briefs from both sides. Given a choice by the judge, the city said it preferred to delay setting a briefing schedule.

Glassman said the city is unclear about why legally the unpaid pension bill should be regarded as an administrative expense. He also said part of the pension bill is for debt or “unfunded liability” incurred before the bankruptcy petition was filed.

“It’s a case of be careful what you ask for,” said Glassman. If CalPERS forces a payment the city can’t make, he said, the city might have to reject its CalPERS contract, triggering a debt adjustment and a “catastrophic result” that no one wants.

The judge said the issue of whether some of the unpaid bill was incurred before the bankruptcy petition was filed will have to be sorted later. Earlier in the hearing, she grilled the CalPERS attorney, Gearin, about the unfunded liability.

The attorney had said that if other employers followed San Bernardino and stopped making pension payments questions would be raised about the “soundness” of the pension system.

“Is it ever, quote, ‘sound?’” asked the judge. With or without San Bernardino’s pension payments, she said, CalPERS is “hardly sound” because of huge investment losses during the economic downturn.

The judge said CalPERS seems to have a “continuing uphill battle” to become sound. At the last actuarial valuation, CalPERS had about 70 percent of the assets projected to be needed for full funding over 30 years.

Jury said assuming investment returns averaging 8 percent may be “conservative” over the last century, but over the last four years 8 percent is “optimistic.” CalPERS lowered its earnings forecast from 7.75 percent to 7.5 percent earlier this year.

Gearin said the funding level is a “snapshot” in time that tends to move up and down with the economy, producing a surplus about a decade ago. He said any “pension reform” should be done through the Legislature not the bankruptcy process.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Posted 24 Dec 12

17 Responses to “San Bernardino may have to pay full pension tab”

  1. SeeSaw Says:

    CalPERS might end up owning a City.

  2. No Angel Says:

    And what a shining example of sound governance, prosperity and progress SB will be under Calpers. We wait with bated breath.

  3. captain Says:

    Excellent point, No Angel. From a previous post:

    On a related note there is an excellent Editorial in the Contra Costa Times : “Flawed pension reform bill result of flawed process”

    Here is an excerpt:

    “while the pension bill was sold as reform, it wasn’t. It fiddled on the margins, a small down payment on a huge debt. The state has a pension shortfall of, conservatively, $257 billion. That averages $20,700 per California household.

    The California Public Employees’ Retirement System, the largest pension plan in the nation, has about $117 billion of the debt. Yet, by CalPERS’ quickie analysis, released last week, the present value of the savings from the bill was, at best, $15 billion.”

    CalPERS earned 1% in FY2011-12, on assets of 239.6 billion. That means they didn’t earn 6.75% of their Assumed Rate of Return which is 7.75%. 239.6B * .0675 = an additional 16.17 Billion in unfunded pension liability. Essentially we are in even worse shape with the so-called pension reform then we were just 1 year ago. It is even worse because some people will assume the problem is being addressed when it really isn’t.

    We’ve added over 16 Billion in taxpayer backed debt obligations (FY2011-12) while the present value of CalPERS claimed 40-60 billion in savings is, over the next thirty years, really only 15 Billion in present value numbers, at best.

    It should also be noted that the increased costs currently being charged to the state, counties, cities, and special districts – although already double to triple the normal cost (even more in some cases) of said pensions, are only designed to bring the funding level to 80 percent over the next thirty years. So, essentially, the present value of the CalPERS savings over the next thirty years has been completely WIPED-OUT in the period beginning July1, 2011 and ending June 30, 2012 (FY 2011-12), while charging taxpayers exorbitant rates that only aspire to bring the fund to a minimumally acceptable pension funding standard over the next thirty years. FOR ALL OF CalPERS CLAIMS OF PURSUING GOOD CORPORATE GOVERNANCE POLICIES THEY APPARENTLY ONLY EXTEND TO ORGANIZATIONS OTHER THAN THEMSELVES!

    CalPERS current year isn’t going any better almost halfway through their current fiscal year (FY 2012-13).

    When your goal is to fund the minimum acceptable threshold of 80%, and you’re failing, it only means that the costs currently being charged to member agencies (state, county, city, special district (taxpayers)) aren’t enough to support the current PONZI scheme. Costs will continue to rise forcing the continuation of: reduced services, road & infrastructure maintenance, the continuation of rapidly rising pension costs “at an increasingly deferred pace“ that does NOT actually represent the true cost, and the continuation of the unions and CalPERS efforts to do just enough to ensure those cost do NOT rise so fast that cities are forced to cut wages of their members. That’s why we continue to see every effort being made to defer as much debt as possible (and that is happening in the reworking of contracts in cities up & down this state (new forms of deferred compensation)) and the continued deferral of infrastructure and road repair – because most people don‘t notice these deferrals.

  4. captain Says:

    … and all those deferrals are what IS allowing cover for state and local politicians to continue spending beyond our means. CalPERS claims that these notorious “vested pension rights” – even going forward, are etched in stone provides cover for our elected politicians to claim they’ve done everything they can; they haven‘t. Of course now that the union funded Democrats have a super majority all bets are off regarding the acceleration of increased taxes & fees that will be necessary to cover the habitual overspending and continuation of the pension Ponzi scheme.

    My feeling is it will take the blatant truth that only real numbers can provide before we see real reform. Fortunately that day is coming. With the help of the new reporting requirements soon to come from GASBy, and the new ratings soon come to from Moody’s & others, and the ever increasing legal challenges to the CalPERS Castle coming from Bankrupt Cities and Bond Insurers – there just may be hope for real reform. Of course the Super Majority can continue to derail those hopes by imposing new taxes, thereby deferring one problem further into the future while creating even more problems in the present.

    CalPERs and their union dominated board of directors that consists of undereducated, unqualified, and unconcerned members that are only to happy to continue the PIPE-DREAM of promising employees everything under the sun. As long as they believe taxpayers will have to pony-up the dollars CalPERS demands or, under the worse case scenario, sell public parks, city hall, city utilities and everything else considered a taxpayer/city asset on the balance sheet, neither CalPERS or the Unions will ever concede anything.

    That is exactly why I look forward to CalPERS destroying a city and claiming the city needs to liquidate assets to fund the pensions. It may only be then that the Geniuses at CalPERS realize that many cities are REALLY bankrupt. But even then the CalPERS Board of Directors will still be scratching their collective head wondering what went wrong with their end game?

  5. Tough Love Says:

    Run with this Captain !

    After almost 5 years, I’ve grown weary of this battle and may step away in the new year. The media and many pension reform advocates have been educated to the financial rape being perpetrated upon the Taxpayers by the GREEDY Public Sector Unions/workers and the self-serving, contribution-soliciting, vote-selling politicians who approved these grossly excessive pensions and benefits.

    If we don’t fix the NOW (and for CURRENT, not just NEW employees) we’ll be Greece in 5 years.

  6. SkippingDog Says:

    What the San Bernardino case has really shown us is that the Chapter 9 municipal bankruptcy option must be supervised even more closely than now required under the legislation passed two years ago. Since a municipal bankruptcy can clearly have adverse consequences for bond holders, other municipalities, and even the state itself, it is now clear that a city seeking Chapter 9 protections should be required to obtain actual permission for such a filing from the Secretary of State or, possibly, even the Governor.

    I’m confident that the legislation to further restrict Chapter 9 access will be coming when our legislature reconvenes in the new year.

  7. SeeSaw Says:

    There are many miscellaneous, advanced educational degrees among the 13 members of the CalPERS Board of Administration–including MBA’s and PhDs. I’m curious as to what Captain would view as adequate education for that group.

    The City of San Bernardino was very poorly managed by its officials for years–add that to the housing bubble, and the disastrous financial collapse of 2008, the perfect storm emerged for SB. Wishing to see its plunder come full circle, with CalPERS being forced to play a part, just so you can gloat, is shameful.

  8. Tough Love Says:

    Skippy, What an absurd comment. Your answer to a city trying to work out from it’s financial distress is .. IF THE WORKOUT HURTS PUBLIC SECTOR WORKERS … then have those who benefit from the current structure erect more legal barriers to that workout.

    Pathetic !

    All the barriers will mean nothing when the funds don’t exist now and never will.

  9. Tough Love Says:

    SeeSaw, You’ll get a kick from this one …

    NJ’s Gov. Christie, got a NJ (very high ranking police retiree if I recall correctly) appointed to an executive position in the NY-NJ Port Authority.

    Turns out that the Port Authority had to fire him as his educational credential were phony … a mail order degree. Nobody ever checked as he rose within the ranks of the Police.

    What a hoot !

  10. SeeSaw Says:

    A hoot because you get a feather in your cap, for showing you avert your attention away from our business in CA long enough to look at your own back yard, sometimes? This story is not a public sector thing–it is a human deficiency thing. Look at all the fake doctors and dentists that come to light after somebody treated, by one, dies. We did have a “fake” governor, but I would be extremely shocked to see a CalPERS Board Member with fake credentials, expecially since CalPERS did a pretty good house-cleaning after the Villalobos-Buenrostro era.

  11. captain Says:

    SeeSaw, those are hardly the type of comments I’d expect from a little old lady from Pasadena, on a small pension. Seems to me that you, when agitated, shift into your true self – become who you really are.

    Instead of defending all things CalPERS while relying on your poor little old lady routine, why don’t you work a bit harder on justifying your position (without the irrelevant nonsense of working for $1.85 per hour).

    What is the average pension for a thirty year Public Safety employee that retired in 2011 (state and local) under the CalPERS plan? What are those numbers for SB? You clearly have access to these numbers, or the people that can provide them, so please share them or provide the link.

    Also, what is the average funding level of both Public Safety & Misc. employee PENSION plans for local governments (I’m not interested in the state numbers)? How has that number changed over the past 5, 10 years?

    Why has the employer paid contributions (tax payer dollars) doubled or tripled over the past several years while the funding level, at the same time, has decreased substantially? And why, despite many cities, counties, and special districts selling billions in Pension Obligations Bonds, is the funding ratio continuing to deteroriate? If the average funding ratio for local goverments is 62%, and that average includes POB’s and double or triple payments, should we even give CalPERS credit for the anemic 62% funding Ratio?

    SeeSaw, what do you think about CalPERS pushing San Bernardino towards a “Fresh Start” (refinancing 15 years of debt over a thirty year period and calling it a solution) without pension reform? Do you think this plan will benefit anyone other than CalPERS?

    I wonder what the CalPERS Board thinks?

  12. SeeSaw Says:

    My age is not anything under my control, and I do my best to deal with it and stay as healthy as possible. My salary of $1.85/hr, when I first started working in the public sector, is not irrelevant, because it was the true situation for 1968. It also goes to prove that most people of my ilk did not start out in those days with pensions, which in fact, didn’t even exist in my municipality until the 70’s. My complete tenure as a public employee was 41 years and 8 months and I was just breaking $50,000 at the time of my retirement–which also proves that I was never on what you might call a, “gravy train”. My spouse had his carpenter pension frozen in 1986, and thanks to my public pension we are doing fine.

    I have no concern about the average pension amount for any specific 30-year career safety employee’ group, and I don’t seek out those stats. I do not concern myself with how much more Joe Blow is making than me, except to put forth the fact that my former CM gets six times more than I, and he was not a union member,as were none of his ilk. The joke is on you people, who think the union members are the ones behind all the high figures, bandied about concerning public sector pensions. People who get more than me have more money to help the economy. I do concern myself with the CalPERS bottom line–I look at it every day. .

    The blog-touted figure of $68,000+ for 30-year career retirees at the end of Fiscal Year 2011, is from one specific group, in a total of thousands of CalPERS retirees, at the same time. The average pension for all CalPERS retirees in 2011 was $3065/mo. The average pension for all CalPERS members, who retired at the conclusion of Fiscal Year 2011-2012, is $3025/mo–$40 lower than the previous year.

    I have no control over the situation in SB–I am concerned, as most people are. You are referring to a smoothing plan that would leave current employees and retirees whole. You think the pensions should be cut. I don’t. The CalPERS Board takes its fiduciary duty to the retirees seriously–that’s what it thinks. If any pensions, including mine, are subject to change, in the future, I will get that information from my former employer and CalPERS, and will deal with whatever happens, in the best way possible.

    I certainly do not intend to sit around and fret over the threats that come from your ilk. It is my choice to access this forum, and I can turn off your poison any time. You should probably run for the CalPERS Board, since, according to you, the current makeup is so undereducated and clueless.

    I am comfortable in my own skin–I can be a little old lady from Pasadena or a little old lady from the Inland Empire. Who cares! I know I am just a taxxpayer, like you. (I did start my working life in CA with a defense contractor in Pasadena–private sector. As I recall, that job started at $1.30/hr. No pension there either.)

  13. SkippingDog Says:

    TL – My comment is entirely in the mainstream, unlike most of yours. If you’ll do the slightest bit of research, you’ll quickly find that the majority of states either don’t permit municipalities to seek the protections of Chapter 9 at all, or their respective state laws require that a municipality specifically seek and obtain permission from the state before it files for Chapter 9 protection. In California, municipalities could, until recently, file on their own initiative under what the courts considered “blanket permission” from the state. Only within the last couple of years has there been any effort to exercise some minor level of state oversight, and that has been limited to the fact finding meetings and mediation required by recent law before the municipality is free to file. Alternatively, as shown by the San Bernardino case, a municipality can declare a fiscal emergency and bypass the new statutory requirements.

    California should join the majority of states in either prohibiting or directly regulating any effort by a municipality to file for Chapter 9 bankruptcy. Now that we’ve seen how cities like San Bernardino will attempt to manipulate current law, the only real choice is to remove their ability to do so.

  14. Tough Love Says:

    SkippingDog. Quoting …”California should join the majority of states in either prohibiting or directly regulating any effort by a municipality to file for Chapter 9 bankruptcy. Now that we’ve seen how cities like San Bernardino will attempt to manipulate current law, the only real choice is to remove their ability to do so.”

    THAT’s the perspective from YOU, a Public Sector retiree resisting any pension reform, no matter how small.

    The Taxpayers want MATERIAL reform, which (by way of unfettered Ch 9 Bankruptcy if necessary), requires a reduction in FUTURE service pension accruals of CURRENT workers,. AND where the financial situation demands, a reduction in the pension accruals for PAST service of both actives and those already retired.

    THAT’s is EXACTLY the reason why bankruptcy laws exist.

  15. SeeSaw Says:

    Thankfully, we have existing laws in CA that prevent you from running “Harry-Carrie” over our public sector, the way you want, TL. You will either have to move to CA and get elected to office, so that you can act on your irrational hatrid towards CA’s public sector unions, or get a new drum set. The one you have been using is completely worn out. There is a new Pension Reform Law going into effect in CA next week, in case you hadn’t focused your telescope in that direction.

  16. captain Says:

    CalPERS released their 2012 CAFR just a few hours ago. Lots to be concerned about beginning with their org. chart (page 9). Seems the CalPERS Board, dominated by the unions and mostly unqualified to be controlling the largest pension fund in the nation, have complete control of the CEO and all beneath her, and have total control of the investment arm of the organization ( the CEO has a dotted line to the investment arm of CalPERS which denotes a quasi control).

    The CalPERS Board of Directors (Board of Administration) is an underperforming group at best. The current President of the CalPERS board credentials is mainly as a Glazier for the Sonoma School District while doing double time as a union president, and the most recent elected board member was a union rep while working as a book store coordinator for a community college. Not sure about the credentials of the other four union elected reps but it would be interesting to view a story regarding their credentials in support of controlling the nations largest pension fund.

    While earlier in the year CalPERS was claiming a dismal return of 1.1 percent during fiscal 2011-12, it turns out those weren’t the net returns their 7.75% assumption was based on (and it still is 7.75 percent for everyone but the state plans). The actual returns are 0.14 percent; or more pain for state, county, local, and special district forms of government & the taxpayers that guarantee the revenue losses of each of these layers of CA government.

    The disparity between contributions and payouts continues to accelerate at an alarming pace. It was only a few years ago that the difference represented a negative 2 billion dollars annually. That number has grown to a negative 5 billion in short order, which indicates a dangerous trend whereby payouts are growing much faster than contributions.

    In the right hand column of page 17, of the CalPERS 2012 CAFR (Other Post Employment Benefits, Health and Long term Care Programs), can someone explain the following which appears toward the end of the column:

    “The estimated liability for future policy benefits reflects worse than expected morbidity (i.e. claims), higher than expected
    persistency, which results in more projected future
    claims, and lower than expected investment returns.
    The major driving factor in the increase in estimated
    liability for future benefits was primarily from the
    reduction in discount rate from the 2011 calendar year
    rate of 6.25 percent for projection years 1-10 and 7.60
    percent for years 11 and beyond to this year’s discount
    rate of a level 5.75 percent”

    My question is why is it O.K. to lower the discount rate to 5.75 percent in this category while fighting tooth and nail to not lower the discount rate, to even the CalPERS internally recommended rate of 7.25 percent, for the CalPERS retirement fund (PERF)? How is morbidity, persistency, and lower than expected investment returns different from CalPERS recent history of lower than expected investment returns, their persistency in denying or even acknowledging they have a problem, and current fiscal reality?

    Those are my comments through page 20. The Link to the just released CalPERS CAFR:

    Click to access cafr-2012.pdf

  17. Tough Love Says:

    Captain, I’ll take an educated guess at answering your (following) question …

    “My question is why is it O.K. to lower the discount rate to 5.75 percent in this category while fighting tooth and nail to not lower the discount rate, to even the CalPERS internally recommended rate of 7.25 percent, for the CalPERS retirement fund (PERF)?”

    Assuming a high percentage of retirees are covered by Medicare (as Primary coverage) once they attain age 65, the bulk of clam costs come from those younger than age 65. As such, the average “duration” of these claim is probably abound 5-10 years (while 15+ would be the similar duration for pension liabilities). A lower discount rate is appropriate for discounting the shorter duration of the Claim liabilities especially given the VERY low current interest rate environment and investing the funds that back these liabilities in a bond/equity portfolio with a much shorter duration.

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