Pensions still cloud Stockton bankruptcy exit

With a new twist, Stockton’s plan to leave a huge pension debt untouched was still an issue last week as the city council, hoping to end a two-year bankruptcy, approved settlements for 95 percent of the claims.

The settlements include Assured Guaranty and National Public Finance Guarantee, the main opponents of Stockton’s eligibility for bankruptcy. The bond insurers argued that an early plan to cut bond debt, but not pension debt, treated creditors unfairly.

Now the last major creditor that has not settled, Franklin Bonds, argues that if Stockton exits bankruptcy without cutting pension debt, the city could slide back toward insolvency like Vallejo.

A trial is scheduled May 12 if the city and Franklin do not reach an agreement. While Assured and National recover most if not all of their money under the exit plan, Franklin issued an unsecured loan and would receive $94,000 for a $37 million debt.

A Wall Street credit rating agency, Moody’s, said in February that without pension relief Vallejo, which emerged from bankruptcy in November 2011, and the two cities currently in bankruptcy, Stockton and San Bernardino, risk returning to insolvency.

Last month U.S. Bankruptcy Judge Christopher Klein said he has seen news reports about Vallejo’s budget problems and wants to be sure that if Stockton exits bankruptcy without addressing pensions, the city will not face a second insolvency.

Not mentioning Vallejo, Klein made a similar remark at a hearing last November: “If I thought there was going to have to be another Chapter 9 (bankruptcy) case in 10 years, I probably would not confirm the plan. I’m not sure any judge would.”

In January a deputy city manager, Kurt Wilson, was promoted to city manager to replace the architect of the Stockton bankruptcy, Bob Deis, who retired. Deis said pensions are needed to be competitive in the job marketplace, particularly for police.

Kurt Wilson

Kurt Wilson

Vallejo officials said they considered trying to cut pension debt, but did not after CalPERS threatened a costly legal battle. The Stockton plan eliminates retiree health care, replacing a $546 million long-term debt with a $5 million lump-sum payment.

“You directed us to make sure that if we were going to endure this painful process of bankruptcy, we were going to do it in a way that meant we would never come back to bankruptcy,” Wilson told the council last week.

The Stockton exit plan, approved by most of the creditors, shows pension costs rising from about 10 percent of the general fund to near 20 percent by the end of the decade, where it remains for another decade before beginning a long drop.

That’s a big bite from the budget, diverting money from services and programs. A governor’s pension commission report in 2008 said retirement costs were about 4 percent of most local government general funds.

In San Diego and San Jose, where voters approved sweeping cost-cutting pension reforms two years ago, retirement costs were taking 20 percent or more of the general funds.

A chart in Wilson’s presentation to the council shows that pension costs are a main driver in projections that the Stockton general fund reserve will stay above a warning level of 5 percent, before climbing over three decades to the recommended goal of 17 percent.

A key part of the Stockton exit plan is Measure A, a ¾-cent sales tax increase approved by voters in November that helps pay for the anti-crime Marshall Plan and 120 additional police officers.

FC2

Vallejo drew attention with a $5.2 million budget gap. But officials said the the deficit was a “placeholder” intended to be closed by labor cuts. The gap was closed last month, mainly through retiree health care cuts imposed on police and negotiated with managers.

After deep police and firefighter cuts, Vallejo approved a 1-cent sales tax increase. Now it’s building a reserve and paying down pension and retiree health care debt. The city made an extra $6.6 million payment to the California Public Employees Retirement System.

“We are not on the brink of bankruptcy,” Deborah Lauchner, Vallejo finance officer, said last month. “We are not going there.”

Late last month Franklin filed a report from a turnaround consultant, Charles Moore, that said Vallejo’s failure to reduce pension obligations while in bankruptcy increases the likelihood of a second bankruptcy.

“This presents a troubling precedent for the City (Stockton) which, like Vallejo, proposes to squander the opportunity to restructure pension liability in its Chapter 9 case,” said Moore.

His report said Stockton pension costs, particularly for police and firefighters, are “very high, growing and unpredictable.” Safety rates are expected to reach 57 percent of pay in 2019, well above the peer average of 45 percent.

Moore said the amount of the Stockton general fund projected to be spent on pensions, reaching 18 percent in 2018 and remaining at that level for a dozen years, is “unsustainably high,” nearly double the 9.6 percent Stockton average from 1999 to 2011.

Replying to Franklin’s expert, Stockton filed a report early this month from Kim Nicholl of Segal, the actuarial firm that made projections used in the city’s plan to exit bankruptcy.

He said the Franklin report did not disclose that Segal used a more conservative annual earnings forecast than CalPERS to discount future Stockton pension debt, 7.25 percent instead of 7.5 percent.

Nicholl said Stockton cut retirement costs by reducing salaries, requiring employees to contribute 7 to 9 percent of pay toward their pensions and eliminating retiree health care.

The Franklin report does not explain why the projected Stockton retirement costs would be “unsustainably high,” said Nicholl, and does not offer any suggestions for how pension debt could be cut.

He said if Stockton ends or cuts pension contributions, CalPERS might assess a “massive termination liability” of $1.6 billion that, if not paid by the city, could severely reduce retiree pensions and leave active employees with no pension.

Among the problems for Judge Klein if he looks at whether the Stockton exit plan might lead to a second bankruptcy: Future pension costs, varying with investment earnings and other factors, are difficult to predict with much precision.

Federal bankruptcy courts can overturn labor contracts, as happened with an electrical workers union contract in the Vallejo bankruptcy. But CalPERS argues that it’s an arm of the state, and a bankruptcy court cannot interfere with state-local government relationships.

Last week, Wilson said Stockton could emerge from bankruptcy as soon as June 30 if the judge approves the exit plan. If the plan is rejected, he said, the bankruptcy could be extended another four to six months, delaying an exit until the end of the year.

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 21 Apr 14

24 Responses to “Pensions still cloud Stockton bankruptcy exit”

  1. John Moore Says:

    If Stockton intends to hire 120 police officers with the sales tax proceeds, they should all be new hires under PEPRA; otherwise the new hires would create a new pension deficit.

  2. SeeSaw Says:

    I agree. I don’t know if Charter cities are covered by PEPRA or not.

  3. Fred Says:

    To answer the above questions posed by SeeSaw and Mr. Moore, all new city employees in Stockton, including the police officers are being hired under the new retirement formula in the law which for safety members is 2.7@57. And all officers are being paid at significantly lower levels than before the bankruptcy filing as a part of the city “Pendency Plan.” There is no post retirement medical benefit offered as before, which was a medical plan that covered the employee between retirement and upon reaching Medicare age eligibility.

    I don’t know if the PEPRA law applies to all charter cities, but I believe it does. I can say that in Stockton the formula for safety members listed above is what they are being hired under.

    To be up front, I am a city employee in Stockton, who works a “Safety” position, so as to not mislead anyone here who reads this post. I can say that for me personally, my own reduction in pay was over 24%, some reductions were more, some less, but mine is representative of someone with over 20 years of service.

  4. SeeSaw Says:

    Thank you.

  5. Are you sure about that, Fred Says:

    Fred Says:

    To answer the above questions posed by SeeSaw and Mr. Moore, all new city employees in Stockton, including the police officers are being hired under the new retirement formula in the law which for safety members is 2.7@57.

    Fred, are you saying Stockton isn’t hiring any laterals from other cities Safety departments, or other employees from non-safety departments? I seriously doubt that’s the case. Maybe you can provide a news story that substantiates that claim?

  6. SeeSaw Says:

    I don’t believe that laterals take the formula from the former employer with them. When they change employers, the service going forward is earned at the rate in effect with that employer.

    I had colleagues that left my City, and the formula at the new City was lower than the former City. Years of service in multiple agencies and formulas in effect at each, are all used in the retirement calculation.

  7. althink81 Says:

    Stockton originally proposed reducing its unusually high pension COLA. Per the Stockton Record, general employees have a 5 % pension COLA which is higher than most CalPERS (no info give on other Stockton Plans). At a minimum, unusually high pension COLA for all Stockton pension plans should be reduced to typical values. There is no labor market justification for maintaining the higher COLAs.

    Other state and cities have focused on reducing COLAs as the single most important change they can make to gain control over long-term pension costs. It is inconceivable to me that Stockton’s bankruptcy exit plan would be approved without the long-term benefits of this change that Stockton first proposed.

    Not sure why Stockton backed off this idea, but it appeared to be concern that they could not afford to fight CalPERS legal and perhaps some self-interest. Judge Klein seems ready to put CalPERS in its place and is it too much to expect principled action from city officials?

  8. Fred Says:

    To “Are you about that”. To answer your question, if it is one.

    Stockton does recruit and attempt to hire qualified lateral entry officers, except for one thing. Nobody applies to come here as a lateral anymore. Why would they? Everyone knows the problems occurring with the city. The fact is, it is easier to get hired for more pay, and better benefits elsewhere, so the numbers of those applying to come here as a lateral have dwindled to nothing. Those that do usually have issues in their past that prevents them from getting hired anywhere. Yes, there are a Couple, just a couple. Out of over 150 officers hired over the last 2 years.

    The city is going to try the 120 as described above over a three year period. 40 per year. Which means they will have to hire 55-60 each year to keep up with attrition of various kinds. All of whom will be hired at the 2.7@57 formula.

    I’ve been around long enough to also know that a large number of these fine young officers who have been hired and trained here will in fact Lateral to another department in the next few years. For more pay, better working conditions, better benefits overall, and probably a more supportive city leadership and citizens that they will serve. I’ve seen over 100 friends and colleagues with extensive experience do just that over the last couple of years.

    You can doubt me, or seriously doubt me I suppose. I don’t mind. But what I state is factual. I won’t link a newspaper article as I am not aware of one which has broken this down in an article.

    If in your question you ask if Lateral Officers are offered the 3@50 formula as a “Legacy” employee I think it is reasonable to ask. The truth is I am not certain. It is not clearly described in either the city’s HR website, and I do not see it in the current MOU for police. What I do know is that even if they did offer that, it applies to a Very Few people, as I described above.

    If a city employee from another city department applies to be a police officer or firefighter and is selected, they would Not be “Legacy” employees, they would come in under the new formula as well.

  9. Are you sure about that, Fred Says:

    SeeSaw Says:

    “I don’t believe that laterals take the formula from the former employer with them.”

    That would be incorrect.

  10. Fred Says:

    To “Althink81”. The contracted COLA rate for City of Stockton safety members is 2%, not 5. I don’t think the Stockton Record meant to intentionally mislead anyone when they wrote the article you refer to, but I can tell you it does not apply to police officers in Stockton after retirement. Our COLA is capped at 2%.

    I believe the 5% COLA they speak of applies to a select few in City Hall.

  11. Fred Says:

    SeeSaw,

    Some agencies who hire Lateral Entry Officers will hire “Legacy” employees at the 3@50 firmula. To be fair, it should be stated. Those agencies are few, but they do exist.

  12. Captain Says:

    Fred says: “Stockton does recruit and attempt to hire qualified lateral entry officers”.

    What is a qualified lateral entry officer?

  13. Fred Says:

    Captain, a qualified lateral entry officer is someone who possesses their CA POST Basic certificate (Earned after attending an Academy and basically passing a probationary period with a department) and then passes the required background investigation, psychological, medical etc. with the agency they apply to.

    At one time, Stockton hired many Laterals, and many applied. As it happens, I was one of the first back in the very early 1990’s.

    But this is no longer true. The city receives very few lateral applicants. And those that they do receive, many have baggage of one sort or another that prevents them from getting hired (At least by an agency that doesn’t want to take on someone else’s former problem)

  14. SeeSaw Says:

    Fred, How is it legal under PEPRA to hire laterals and give them the pre-PEPRA formula?

  15. Fred Says:

    SeeSaw,

    I cannot give a good answer to that. I’m not an expert in PEPRA, nor am I a union rep.

    Having said that, I have several friends who left (Lateral) to other agencies. Some maintained 3@50 as the agency they went to had it, and since they had it here they were able to keep it. I have heard that referred to as being a “Legacy” member. Some went to agencies with 3@55, so they now earn their time under that particular formula.

    As an example, Antioch advertises for lateral entry officers by stating that “Legacy” officers who lateral to that agency will maintain 3@50 if they come from an agency that had it originally. There are agencies that will offer this, but as I said, not all do.

    Hope that answers the question. I do not know how it is legal, but if it were illegal I don’t see how they could continue to do offer it.

  16. SeeSaw Says:

    @Are you sure about that Fred? Are you referring to lateral safey officers or lateral public employees in general? Please elaborate your charge that I am incorrect in saying that a lateral employee may not take the prior formula with him/her to the new workplace.

    I was a public employee at one workplace during my entire tenure. I have talked with colleagues who had different employers during their, respective, tenures. They have told me that each of their, respective, formulas with service credit, are taken into the retirement calculation. I knew employees who were covered by the 3% at 60 plan at my workplace who left and took up employment with a neighboring city that had a 2% at 55 pension plan. The employee leaves the former formula behind as far as future service credit is concerned.

  17. SeeSaw Says:

    Fred, I think that the other commenter confused things, regarding screen names, a little. I was responding to him. I thank you for your willingess to provide information that is the “bird’s-eye view”. On many comment forums, some commenters consider themselves experts about what goes on in, respective, public agencys, even though they are not there. Even I, a former public employee, bought into the claim that Stockton provides its retirees with a 5% COLA–I had thought that was quite irresponsible on the part of that City. Many times the COLA is less than 2%, depending on the CPI.

  18. Fred Says:

    SeeSaw, No problem.

    Appendix B, Page B-1. Shows the contracted COLA rate for safety members. 2%, and it has been this way for as long as I know.

    http://www.calpers.ca.gov/eip-docs/about/pubs/public-agency-reports/cities-towns/2011/stockton-city-safety-2011.pdf

    Appendix B, Page b-1. Shows the contracted COLA rate for Misc. members within the city of Stockton. Here is where you will see the 5% COLA rate, and it applies to a very few people in the city, certainly not the rank and file members. But this is where many gain the assumption that all city employees get up to a 5% COLA, which is not the case.

    http://www.calpers.ca.gov/eip-docs/about/pubs/public-agency-reports/cities-towns/2011/stockton-city-miscellaneous-2011.pdf

    And yes, the COLA is a percentage of one of the CPI’s, not sure which one they use.

    I don’t see any issue with the debate over pensions. I am a taxpayer like everybody else. My only contribution here, which is limited, is to share accurate or at least information which has been based upon my experience. I come from a public service family. I did not get into this business to get rich and knew, maybe better than others that we were going to take our lumps with the economic downtown, just like everybody else. I can live with that. The only real issue I have personally I suppose is when is enough, simply enough (As far as pay, benefits reductions). I have been in this line of work for 28 years. One may argue the merits either way, and I suppose there is truth in both sides of the argument. In my case, my pay was reduced by 24% with the backruptcy, medical benefits reduced (both pre and later when I retire), the current medical plan offered by the city is certainly not a Cadillac plan as many suggest. And lastly, as a result of the pay reduction, the retirement check will be reduced accordingly. A significant savings for the city.

    My personal belief is that city leaders squandered multiple millions of dollars on Redevelopment projects that were ridiculous to begin with, funded by transferring money from the General Fund to “Restricted” Redevelopment funds. So when the claim was made that the General Fund was running on fumes, they were right, but that was only half of the equation. The court does not have to consider money in “Restricted” funds in a bankruptcy case, only that which exists in the General Fund. If anyone thinks that the city didn’t prepare their case by transferring money in this manner, then I would refer them to speak to Mark Moses, the former CFO for the City of Stockton. Of course I can guarantee you that one would get a solid, “No comment” from him, which is an answer in and of itself.

    What is also true is that some of these same city “Leaders” benefitted financially and personally by these Redevelopment projects, as family members of theirs are in the local banking industry, among others.

    As for the Bondholders, do they not run the risk of losing on an investment, and do they not calculate that risk when they decide to issue muni bonds? I know my personal investments sometimes go up, and sometimes they go down.

    One may argue the “Unsustainability” of current pensions, but I would hope that those same people criticize those who also squandered the public’s money on unncecessary and stupid projects with the same vigor. I would stand behind them when they did so.

  19. S Moderation Douglas Says:

    ” some commenters consider themselves experts about what goes on in, respective, public agencys, even though they are not there. ”

    Amen.

    On this topic, I bothered to look up (one of) the Stockton contracts a few months ago because a poster was upset that Stockton had a five percent COLA which was “higher than the inflation rate”, so the taxpayers are getting ripped off.

    I suspected, and verified, and corrected the poster that the 5% was NOT automatic, but was, like most other systems, ” 5% OR CPI, whichever is LOWEST”

    I didn’t look at all contracts, but the one under this link still has 5% (or CPI) for the old 2% @ 55, and 2% or CPI for the 2% @ 60.

    http://www.stocktongov.com/government/departments/humanResources/benefits/retirement.html

    Your basic point is clearly correct. WAY too many self proclaimed experts.

  20. S Moderation Douglas Says:

    AND, “a little bit of truth makes the best lie”

    Some irate poster a few years ago stated that someone could work for the city of Stockton for ONE WEEK, then get “free health care for life”

    NO WONDER THE CITY IS GOING BROKE!!! CROOKED BASSTURDS, STEALING WEALTH FROM THE PRIVATE SECTOR!!! OUTRIGHT COLLUSION!!!!

    Just a little research showed the poster was incorrect. Someone could work for the city for one DAY and get retiree healthcare……

    IF….(and ONLY if) he/she had worked for another agency with reciprocity agreements long enough to be vested.

    Big difference, lost on the self proclaimed experts.

  21. joe Says:

    I don’t know of a single agency that allows a lateral to keep their PERS rate if that rate is higher than that of their current contract. My agency hires laterals almost exclusively, and NOBODY gets to keep 3@50 if they come here from another agency. They are immediately converted over to the current formula. Take it or leave it.

  22. toothbrushes Says:

    Fred, Franklin is offered $95000 on @35000000 in bonds. That is a bit more of a hit than the reductions you have seen. I know the retirees got hammered on the medical benefits. Of course, Franklin will fight. I have investments in their bond fund, so I expect it. The Stockton govt was and maybe still is full of corruption. Redevelopment is a ploy to fund money to private interests. I wish the unions would stand up against it, but of course some unions will benefit from some of the projects, so there is no unified voice. The new mayor, Silva, rightfully elected, is a poor choice to lead Stockton. He seems destined for a bad ending,, handcuffs with head down escorted from city hall, perhaps by you or someone you know.
    You are very informative. THANKS.

  23. Fred Says:

    Toothbrushes,

    The retirees lost all medical coverage, current employees are now in a high deductible insurance plan, have seen severe wage reductions, among other things, which are significant savings for the city.

    All of the insurers for the other city bonds, with the exception of Franklin apparently have come to some type of terms with the city. While it has been reported that Franklin has been offered the amounts described above publicly, I would suspect that they have been offered more in closed negotiations, but of course I do not know that for a fact. Shoot, it wouldn’t surprise me if one of the bond funds I have as an investment has an interest in the Franklin fund, who knows…

    Mayor Silva is a joke. While it’s not against the law to be a drunk, a good friend of mine saw him full tilt falling down drunk in public, in Reno in a casino, stumbling along like a lost dog all alone. Seriously, anybody that would have seen the guy and knew him would have had to just sit there and shake their head at this guy’s lack of judgement. Then of course there is his recent “Badge” scandal, where he was giving fake badges to people to protect him, one of whom who’s name was in the local newspaper, is a known gangster from WAY back that I have arrested myself for being in possession of firearms while selling Crack Cocaine. Way to go Mayor…..Fabulous job.

    I have personally dealt with at least two of the people he has appointed to either advisory positions to him or on some city commision. Both times, these people have attempted to use their position to further their own interests by using their “Status” as a crutch in their contacts with the police. In one instance, it was clearly a case of attempted insurance fraud. I saw it coming, and put a stop to it. I won’t get into any further discussion on this, but it is safe to say that Silva himself is clearly an embarrassment to the city as a whole, and it would not surprise me one bit if he did in fact end up getting arrested eventually.

  24. Berryessa Chillin' Says:

    Wow, a 99.75% haircut on that bond! Ouch!

    Thanks to Fred for giving facts on the ground in Stockton. Sounds like a corrupt mess and the police must serve that city as a charity case. God bless you guys!

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