Bankrupt San Bernardino’s new budget restarts CalPERS payments in July after skipping about $13 million in payments this fiscal year. But the next step in the city plan, getting CalPERS to refinance the unpaid bill, is a no-go at this point.
The giant pension fund, alarmed by the unprecedented decision to stop making required pension contributions, is in no mood to give the city an easy out that might tempt other struggling local governments to take the same path.
Restarting general fund pension contributions will not cause the California Public Employees Retirement System to drop its opposition to San Bernardino’s eligibility for bankruptcy, Amy Norris, a CalPERS spokeswoman, said last week.
“San Bernardino currently has $12.3 million outstanding,” said Norris. “California law provides for statutory interest, penalty interest, penalties and costs of collection, all of which are accruing and will continue to accrue until the past due amounts are paid in full.”
San Bernardino, California’s 17th largest city with a population of about 210,000, made an emergency filing for bankruptcy last August. The city said it needed to stay debt collection to have enough cash to meet its monthly payroll.
A 14-month budget approved by the San Bernardino city council last month is based on a “pendency” plan for operating in bankruptcy adopted by the council last November.
Under the plan, the city is not making or “deferring“ $37.4 million in general fund debt payments owed in the current fiscal year that began last July. Nearly half of the amount is for pensions.
The plan defers a $13 million payment to CalPERS, $500,000 to Public Agency Retirement Services (a private firm that provides pension add-ons) and a $3.3 million annual payment on a $50 million pension bond.
Only the CalPERS payments resume in July under the new budget. The sketchy plan for a “fresh start” 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.”
San Bernardino elected officials made a trip to Sacramento last fall to meet with CalPERS. The plan issued in November said “discussions with CalPERS actuarial staff are underway.”
The odds that CalPERS eventually will agree to stretch out payments on the city’s previous pension debt or “unfunded liability,” along with the skipped $13 million annual payment, do not look good.
For one thing, a leading reason that CalPERS adopted a rate hike last month of roughly 50 percent over the next seven years is to get to full funding in 30 years, rather than much later under the previous actuarial policy.
And for another: “We have not received a proposal from the city, and we are not going to amortize the unpaid contributions,” a CalPERS spokesman, Joe DeAnda, said last week.
CalPERS unsuccessfully tried to sue San Bernardino in state court to get the pension payments. If the city is ruled eligible for bankruptcy, CalPERS fears that a “plan of adjustment” to cut debt will include the pension payments.
“It is not mere speculation to say that the city may not be able to pay its post-petition bills after languishing in bankruptcy for an indeterminate amount of time,” said a CalPERS filing in federal bankruptcy court.
“To the contrary, the pendency plan suggests that the city has no intention of paying its postpetition obligations to CalPERS but, instead, intends to ‘modify’ those administrative claims in its plan of adjustment,” the filing said.
As in the Stockton bankruptcy, what would happen if pension debt is cut has not been spelled out. There may be a number of possibilities, ranging from business as usual to pension cuts.
For example, would the city pension fund simply continue with a lower funding level, as often happens after major investment losses during an economic downturn? Or would pensions be reduced in some way to reflect the new lower funding level?
The San Bernardino bankruptcy is an ongoing drama. A new city manager and finance director hired in April of last year quickly discovered that the city would not have enough cash to meet payroll by August.
Then the city manager, suffering from stress, left the job at year’s end along with the finance director. The new city manager, Allen Parker, declared personal bankruptcy in 2010 when hit with legal fees in a disputed Banning Heights water company election.
Last week a group announced a drive to gather the voter signatures needed to place a recall on the November ballot of Mayor Pat Morris, City Attorney James Penman and all seven city council members.
Penman told the San Bernardino Sun newspaper that “out-of-town business people who supported Morris” are pushing the recall. Morris does not plan to run for re-election.
Penman has twice run against Morris for mayor and lost. Morris backed an unsuccessful ballot measure to make the elected city attorney appointed. Penman had his office investigate Morris and others for alleged campaign law violations.
After Penman refused to sign off on an unbalanced budget in 2011, a group of “mostly non-residents” recruited a candidate who unsuccessfully ran against him, he wrote in an op-ed column for the Sun on April 28.
“While we are not out of the woods, and difficulties lie ahead, I can report to you that it is now unlikely the city will dissolve,“ Penman wrote. “The city is no longer in critical danger of being unable to make payroll and your employees continue to report for work.”
The city plans a $26 million cut in salaries and benefits this fiscal year, mainly from reducing full-time positions from 1,141 to 941. Agreements were negotiated with four unions, but similar cuts had to be imposed on three unions, including police.
The police employee share of CalPERS contributions, 9 percent of pay, had been paid by the city along with the employer share, 30 percent of pay. The imposed contract requires police to begin paying the employee share, a big bite out of their paycheck.
Last week the police union put up a big billboard sarcastically “congratulating” city council members who voted to impose the benefit cut for making San Bernardino “the worst run city in America” according to an investment website survey.
“Right now, it looks like everyone’s at everyone’s throat,” an auto dealer told the Sun last week.
In Stockton, the police union bought a house next to the city manager’s home and used billboards to call Stockton one of California’s most dangerous cities, deplore the layoff of cops, tally homicides and post the city manager’s phone number.
The Stockton bankruptcy has not been a dramatic emergency: A 90-day mediation with creditors failed, the city issued a 790-page restructuring plan, agreements were reached with all unions and a court ruled the city eligible for bankruptcy last month.
But a split among elected officials has emerged. A new mayor, Anthony Silva, and others want to put a half-cent sales tax increase on the November ballot to hire 100 more police.
Last week a meeting of a coalition backing the tax proposal featured William Bratton, the well-known former police chief of Los Angeles, New York and Boston who advocates putting more cops on the street.
The tax proposal is opposed by the city manager, Bob Dies, and a majority of the city council, the Stockton Record newspaper said. They fear the tax could create general fund problems and jeopardize the exit from bankruptcy.
Opposition to Stockton’s eligibility for bankruptcy was led by bond insurers. One of their objections was the city proposal to cut bond debt but not the pension debt owed CalPERS, the biggest creditor.
CalPERS is leading the opposition to San Bernardino’s eligibility for bankruptcy, contending it’s not clear that the city lacks cash needed to make pension contributions. Another court hearing is scheduled Tuesday.
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 6 May 13