Pensions still a puzzle in Stockton bankruptcy

A federal judge ruled last week that Stockton’s CalPERS pensions can be cut in bankruptcy. But Stockton does not want to cut pensions, and the lone holdout creditor says it can be paid without cutting pensions.

U.S. Bankruptcy Judge Christopher Klein may have clarified the legal issue of whether CalPERS pensions, widely regarded as untouchable, can be cut if any of the 1,581 local governments in the giant system take the drastic step of bankruptcy.

As CalPERS quickly pointed out in a news release, if the ruling is not put into effect, moved from theory to practice, it’s “not legally binding on any of the parties in the Stockton case or as precedent in any other bankruptcy proceeding.”

The judge is set to rule Oct. 30 on the Stockton “plan of adjustment” to cut debt and emerge from the bankruptcy filed in June 2012. The city has negotiated agreements with all major creditors, except two Franklin bond funds still owed $32 million.

Klein has said he can only confirm or deny the plan, not tell the city how to spend its money. And in a municipal bankruptcy only the city can propose a plan of adjustment, not creditors as in a private-sector bankruptcy.

An issue previously raised, but not much mentioned last week, is whether the Stockton plan cuts enough debt to restore the city’s solvency and avoid a lapse back into a second bankruptcy.

Last November Klein rejected a Franklin argument that the Stockton exit plan failed to disclose enough detail about creditor settlements. But he did say the 30-year plan should cite the “renewal risk” of a ¾-cent sales tax approved by voters that month.

“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,” Klein said. “I’m not sure any judge would.”

Last March Klein said he had seen news reports that Vallejo, which emerged from a 3½-year bankruptcy in November 2011 without cutting pensions, had a large budget deficit and possibly faced a second bankruptcy.

“The court has an independent duty to satisfy itself that the (Stockton) plan is going to work,” Klein said, the Stockton Record newspaper reported. “I’m probably going to have to be persuaded that the plan is going to work.”

A Wall Street credit-rating agency, Moody’s, said in February that without pension relief not only Vallejo, but also Stockton and San Bernardino (which filed for bankruptcy a month after Stockton) are at risk of returning to insolvency.

Franklin did not argue last week that Stockton must cut pensions to avoid a “Chapter 18,” lawyer jargon for a second Chapter 9 bankruptcy. Instead, an attorney said Franklin wants to be a “partner” and let the “city’s rising tide” of prosperity lift all boats.

“It’s possible for the city to confirm a plan that leaves pensions unimpaired,” said Jim Johnston, a Franklin attorney. “It just has to treat Franklin as a dissenting creditor fairly.”

The Stockton long-range budget forecast issued last April (see chart) shows pensions are a key cost driver. The general fund reserve is expected to stay above a warning level of 5 percent, before climbing over three decades to the goal of 17 percent.

Franklin referred to the long-range forecast, with its sizeable planned reserve, when saying Stockton would not have to cut pensions to pay Franklin. The Stockton general fund spent about $183 million last fiscal year.

Stockton
The Stockton exit plan shows the city’s contribution to the California Public Employees Retirement System climbing from about 10 percent of the general fund to 18.5 percent by the end of the decade, and staying there most of the following decade.

A Franklin consultant, Charles Moore, said the Stockton pension cost forecast is “unsustainably high.” He said city CalPERS contributions for police and firefighters are expected to reach 57 percent of pay by 2019, well above the peer average of 45 percent.

A Stockton consultant, Kim Nicholl, said the city pension estimate uses a lower earnings forecast, 7.25 percent, than CalPERS, 7.5 percent. To cut retirement costs, she said, the city cut pay, raised worker pension contributions and ended retiree health care.

Stockton argues that pensions are needed to be competitive in the job marketplace, particularly for police. But the city also has acknowledged unusually high pensions, notably in a video by Councilwoman Kathy Miller posted on YouTube.

“In Stockton employees made what’s known as pension ‘spiking’ into an art form, using overtime and ‘add pays’ in their final working years to secure much larger pensions for the rest of their lives,” Miller said.

In the well-produced video posted by the city a few days after the bankruptcy filing, Miller said some Stockton employees “earn more than 25 percent over the statewide job market.”

How high pay in Stockton drives up pensions apparently can be seen by comparing recently retired safety employees (police and firefighter) in Stockton and Sacramento, a larger neighboring city that shares the same broadcast television market.

The average pension among 112 Stockton safety employees retired for under five years was $88,091 a year. The average pension among 190 Sacramento safety employees retired for under five years was $70,348.

(The pension amounts are reported in the CalPERS annual valuations for the Stockton and Sacramento safety funds as of June 30, 2011.)

A Stockton Record investigation found in March last year that in 2012 salaries of $100,000 or more were earned by 23 percent of the city’s full-time workers, down from about 30 percent two years earlier.

A police chief retired in 2011 with earnings for the year of $413,836, inflated by cashing in unused vacation and sick leave. A community development director retired and then came back on special assignment, earning $436,086 for the year.

After the judge ruled on CalPERS pension cuts last week, attorneys for Franklin and Stockton sparred over whether Stockton had considered alternatives to remaining in the giant pension system.

Johnston, the Franklin attorney, said the Stockton consultant, Nicholl, had not considered using the savings from cutting the pensions of current and retired Stockton employees to finance a CalPERS alternative that would retain and attract employees.

“It just didn’t do the analysis,” he said of the city.

Marc Levinson, the Stockton attorney, said Johnston’s remarks were “offensive” because Nicholl did analyze alternatives to remaining in CalPERS and found that none of them worked.

He said Franklin paid Moore more than $500,000 but “didn’t go out and have an expert come up with a pension alternative.”

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 6 Oct 14

26 Responses to “Pensions still a puzzle in Stockton bankruptcy”

  1. althink81 Says:

    re: “Marc Levinson, the Stockton attorney, said … Nicholl did analyze alternatives to remaining in CalPERS and found that none of them worked.”

    I cannot find details or even summaries of plans analyzed by Kim Nicholl but her conclusions were once summarized as follows: “Not paying CalPERS would mean “termination” of the city’s pension plan. Existing benefits would be scaled back by around 60 percent, and employees would quit the city, according to testimony by Kim Nicholl, a pension expert from Chicago.” Certainly there is no evidence in this statement that adjustment plans (e.g. COLA reduction, future accrual rate reduction, etc) were analyzed. (See: http://www.mercedsunstar.com/2014/06/04/3681332/lawyer-defends-stocktons-decision.html )

    “Pension expert from Chicago” means Kim Nicholl works for Segal Consulting which describes itself as providing consulting services to public unions and plans. To keep that business you have to wonder if Ms Nicholl was willing or allowed to stray from CalPERS views on allowed changes. See: http://www.segalco.com/services/retirement-benefits-public-sector/our-team/ .

    Since then, Judge Klein has clarified the rules of the game for CalPERS. Ms Nicholl’s work needs to be redone using the correct rules.

    It appears that the Stockton taxpayers association also supports new analysis of pension plan adjustments. See the last two paragraphs in: “California Public Pensions Put on Notice” at http://reason.com/archives/2014/10/04/stockton-ruling-says-pensions-can-be-cut .

  2. John Moore Says:

    In my review of the court filings, I did not find a single reference to a modest stock/bond market loss(2001-2,2008-9). Common sense tells us that the markets have a decline at least every ten years,

    Let’s assume a year where the market is simply flat–zero upside. CalPERs has about a $360-70 Billion PVB. In that year it would fail to earn 7.5%(investment rate) on its PVB. At a $365B PVB, the loss will be $27,175,000,000.

    What if it lost 10%? Earning less than 7.5% and net losses in the market will happen two or three times in a 26 year plan. Plan ahead

  3. SeeSaw Says:

    The Judge gave Stockton permission to do something that it had not requested. He should have ruled on the plan of adjustment before he started opining out loud.

  4. Tough Love Says:

    SeeSaw …….. Seems like you object to a judge (from the FEDERAL bench) whose in NOT in the CA Public Sector Unions’ pocket or looking NOT to reduce THEIR OWN pensions …. and recognizes the grossly excessive nature of Stockton’s pensions ….. and the need for ALL OF CA to have an effective and quick mechanism to REDUCE them.

    THANK YOU JUDGE KLEIN !

  5. althink81 Says:

    SeeSaw: Actually, early in the process, Stockton did ask CalPERS for a COLA change and was told adjustments were not allowed. Also early in the process Stockton noted it could not afford to fight CalPERS. No wonder Stockton created a plan that does not affect CalPERS.

    Responsibility for the current situation can be placed clearly at the feet of CalPERS legal and its always questionable, self-serving and now proven incorrect legal theories. Union lawyers are free to appeal but CalPERS lawyers need to get with the program that the judge has defined for them. There is no public service justification for CalPERS to appeal or even complain about the ruling. It is their duty to accept it and move on. If they cannot, they should resign.

  6. Captain Says:

    althink81 Says: “Responsibility for the current situation can be placed clearly at the feet of CalPERS legal and its always questionable, self-serving and now proven incorrect legal theories.”

    – While I wan’t to agree with your statement I can’t (it would be easier). The CalPERS legal department isn’t doing anything that the public employee unions aren’t dictacting. If you want to get to the core of the problem you need look no further than the CalPERS Board of Administration & the Democratic appointed officials – which comprise the majority vote. These crooks control everything at CalPERS, including the hiring/firing of the CEO.

    The CalPERS culture has become so TOXIC & CORRUPTED that the employees whom work for CalPERS are rarely willing to challenge anyone associated with the unions, and that includes Jerry Brown and his worthless attempt to challenge the CalPERS Board of Administrations almost complete gutting of his 2012-2013 Pension reform.

    CalPERS culture is so corrupt that there is no answer to their problem short of firing every union elected Board Member, reconstituting the appointed Members, and firing the CEO. That is how corrupt this CALPERS organization is.

  7. SeeSaw Says:

    I expect the judge to follow the law, TL–it has nothing to do with whatever pension plan he has. You need to stop referring to CalPERS lawyers as union lawyers. CalPERS is not union operated–get that straight for once. CalPERS represents all of its 1.6 million members, and many of them were never in unions. Most retirees who were in unions, when they were employed, are not in unions in retirement. As far as accepting the ruling: So far, there is no ruling. The judge opined verbally–that’s all. There is no ruling until the judge rules on the Stockton adjustment plan. If he rules against Stockton I would assume that any appeal responsibilities would rest with Stockton.

  8. SeeSaw Says:

    More hogwash from Captain as usual. He is so besotted with hatrid for CalPERS that he can’t look at anything, having to do with it, objectively. I don’t think this situation is in CalPERS’s court at the moment, Captain–it is in the judge’s and the City of Stockton’s.

  9. Captain Says:

    Seesaw, I don’t hate anything that makes sense. Your comment that I hate CalPERS rape of the taxpayers does make sense. So, I guess we agree.

    Hogwash you say? – because I think you and CalPERS are complete crooks – and I’m not afraid to say it? If my saying That CalPERS is CORRUPT and VERY DESERVING of being EXTINGUISHED hurts your feelings then so be it. I think Judge Klein ruled that while CalPERS & their Legal Department have tried, in vein, to drive the conversation toward CalPERS CONTROLS ALL we have learned that CalPERS is really JUST CORRUPT. The CalPERS Legal Department has been lying while also intimidating every city that has filed bankruptcy with the threat of burying TAXPAYER’s in Legal fees (Vallejo, Stockton, San Bernardino Pacific Grove, etc…). They’ve done all that while claiming that they are the King & Queen of CA.

    CalPERS was once an organization with a purpose. CalPERS is now an organization completely out of control & CORRUPT. CalPERS is nothing more than the Public Employee Union’s Strong Arm – and that has nothing to do with their reason for existing. The sooner this organization called CaLPERS is terminated the better off TAXPAYERS will be. CalPERS has lost their way and violated the trust of an entire state, California.

    CalPERS is Corrupt – as hell!

  10. Captain Says:

    And the CalPERS management continues to take marching orders from their very CORRUPT and UNDEWHELMING, Union Dominated (UNDERQUALIFIED), Board of Misfits/ Failures, they call the Board of Administration.

  11. Captain Says:

    “California’s political watchdog agency will consider quadrupling a fine against newly reelected CalPERS board Vice President – Priya Mathur – for failing to file timely campaign finance reports for 2012 and 2013. …. Commissioners complained that she should have been punished more severely because of earlier reporting violations in 2002, 2007 and 2008

    Mathur, 40, has agreed to pay the new, higher $4,000 fine if the commission approves it at an Oct. 16 meeting. She is the principal financial analyst at the Bay Area Rapid Transit District, where she is paid about $101,000 a year.”

    – the bay area BART riders I know aren’t very happy with the unions or their two STRIKES that left commuters high and dry.

    “Members of local government agencies in the California Public Employees’ Retirement System last week reelected Mathur to a fourth, four-year term on the 13-member Board of Administration”.,

    – God help us all. The Unions have re-elected, to the CalPERS Board, some women that doesn’t care about rules. The Perfect candidate/elected official for the CORRUPT CalPERS BOARD of ADMINISTRATION. And she’s the Vice President of the Board. Nothing like electing a fellow crook to oversee the operations of an already crooked and CORRUPT organization. The woman hasn’t done squat for taxpayers

    If people wonder why I’m so critical of CalPERS maybe the above statements will clarify what I view as the only clarity CORRUPT CalPERS provides. Priya Mathur has been a failure at BART, but a union supporter for the Bart Unions, which is why she was elected to the CalPERS Board of Administration. She will be just another Board member making financial decisions that she knows nothing about. Taxpayers will pay tens of millions based on her pre-determined agenda. The woman doesn’t have a clue.

    The rest of the article: http://www.latimes.com/business/la-fi-calpers-ethics-20141007-story.html

  12. Captain Says:

    Where are you Jerry Brown? You pointed to the CalPERS Board, during your speech to the public regarding pension reform, that the CalPERS Board needed an overhaul. So, JB, where is the reform? You said, if the Board isn’t compliant you will push to make further reforms. When will you do it?

    How much more evidence do you need? If your 99 Pension Reforms, that the CalPERS Board rejected, aren’t reason enough to challenge CaLPERS, then what is enough? Is PEPRA just a joke? Judge Klein provided you with all the ammunition you need.

    If you, Jerry Brown, are really too old to be influenced by special Interests then you have the opportunity to prove it.

  13. SDouglas47 Says:

    TL,

    It appears you are implying that Judge Klein ” recognizes the grossly excessive nature of Stockton’s pensions ….. ”

    From where did you get that idea?

    I see no reference to “excesses” in pensions nor “greed” by Franklin or the other creditors. They are simply debts determined to be divided fairly in bankruptcy.

    The value judgments are yours, not Judge Klein’s.

    He never said the pensions were inherently too high, he said only that Stockton doesn’t have enough money to pay all it’s legal debts, so this one MAY be legally reduced, just like the other legal debts.

    And CalPERS is not the debtor. The employees and retirees of Stockton are. CalPERS is just the agent.

  14. Tough Love Says:

    Captain, Do you realize who you are debating with ? Supposedly (per her own statements) she is a mid-70-ish year old retiree who retired only a few years ago with 37+ years of CA Public Sector service, with a final salary of under $50K ….. certainly NOT a rocket scientist, or one likely capable of heady debate.

  15. Brody s Says:

    TL
    What an arrogant comment. Not useful to the debate and dull.

  16. Brody s Says:

    Ed
    Judge Klien did not clear up any ambiguity as u suggest, he merely ruled. It is not legal authority in any other case anywhere and probably won’t even be the law of the case in a year. Sorry man.

  17. SeeSaw Says:

    I would take issue with your assessment of Pyria Mathur, Captain. I watched her on the Candidate’s forum, even though I had no vote in that election. I doubt she is a union talk-piece–she is obviously in a management position. And for the record, if you did not view her on that forum, she was by far the most intelligent person on the panel. That is why she was elected. Why she can’t get her personal forms in on time, I can’t answer. She is being fined for failing to fill out forms on time–not for anything she did that is illegal. I am puzzled as to you saying she has been a failure at BART. I doubt it, because she is paid over $100,000/yr. and they don’t have failures for that.

  18. SeeSaw Says:

    Why do you debate with me TL? I would find it a breath of fresh air if you did consider that my comments are useless and you have no need to respond.

  19. Captain Says:

    Brody s Says: “Ed Judge Klien did not clear up any ambiguity as u suggest, he merely ruled. It is not legal authority in any other case anywhere and probably won’t even be the law of the case in a year. Sorry man.”

    Nothing like ignoring the truth, spin-doctor Brody. You are correct that he ruled, and, said the following:

    I like this: “Klein said a CalPERS-sponsored state law preventing cities from rejecting their CalPERS contracts in bankruptcy is “flat-out invalid” under the constitutional “supremacy clause” giving federal law priority over state law.

    And this: “The judge said another CalPERS-sponsored state law that gives CalPERS a lien on all city assets, except wages, when they declare insolvency is an invalid attempt by the state Legislature to “edit” the federal bankruptcy law.”

    – and that is a very important distinction. It appears the CalPERS sponsored state laws are frivilous at best under Federal Bankruptcy Laws. Again, “CalPERS-sponsored state law preventing cities from rejecting their CalPERS contracts in bankruptcy is “flat-out invalid””, and … “CalPERS-sponsored state law that gives CalPERS a lien on all city assets, except wages, when they declare insolvency is an invalid attempt by the state Legislature to “edit” the federal bankruptcy law.”

    So CalPERS-sponsored state laws are NOT LAWS AT ALL – but an attempt by a crooked organization (CalPERS) to circumvent actual federal laws, and that is illegal.

    Hopefully the judge will clarify things for all of us, come the end of the month.

  20. Captain Says:

    How was this ever approved in the first place:

    “CalPERS-sponsored state law that gives CalPERS a lien on all city assets, except wages, when they declare insolvency”.

    How is it hat CalPERS was able to develop, market, and secure approval – prior to the actual vote on SB 400, which approved retroactive benefits – which was illegal at the time and still is – while also passing a law (as illegal as we now know it to be -and people knew it was illegal in the first place – and judge Klein just confirmed that) that gave CalPERS the right to place a lien on on all city assets, except wages of employees (of course), when they declare insolvency.

    In other words, a city can’t touch – even in bankruptcy under the CalPERS law – wages of employees. BUT, they, CalPERS and the public employee unions, can take control of every dollar of city assetts necessary to satisfy the unfunded pension liabilities they themselves have created.

    Did I get that right? If so – CalPERS IS CORRUPT!

  21. spension Says:

    Good article on the Dutch…

    http://www.nytimes.com/2014/10/12/business/no-smoke-no-mirrors-the-dutch-pension-plan.html?_r=0

  22. Brody s Says:

    Wow captain!

    U missed the point
    Again!
    The judge has no power to design a plan
    And his opinion while fun for you is only temporary and if zero legal authority in any other case
    I guess you like to gloss over the truth!
    Wait about 6 months!
    We’ll chat!

  23. Captain Says:

    Brody s, I never said the judge could design a plan. He can approve/reject. He can rule on matters of law, and he’s done that (He’s a judge):

    1) Klein said a CalPERS-sponsored state law preventing cities from rejecting their CalPERS contracts in bankruptcy is “flat-out invalid” under the constitutional “supremacy clause” giving federal law priority over state law.

    2) CalPERS-sponsored state law that gives CalPERS a lien on all city assets, except wages, when they declare insolvency is an invalid attempt by the state Legislature to “edit” the federal bankruptcy law.”

    You may be happy to know that State Treasuer, Bill Lockyer, thinks the unions will lobby to outlaw California Bankruptcies altogether. The reasoning is that if bankruptcies are illegal in the state of California then the federal government, and federal bankruptcy Law, can’t do anything about it because the federals laws won’t apply in California. In other words, if there is no such thing as bankruptcy in CA, then there is no such thing as Federal Bankruptcy Laws in a state without Bankruptcy. Is that where you want this to go?

    I’m not sure how that benefits taxpayers (IT DOESN”T), but I’m pretty sure it would eliminate my points 1&2 of the judges ruling (above) to the benefit of the employee unions.

  24. Captain Says:

    spension Says: Good article on the Dutch…

    http://www.nytimes.com/2014/10/12/business/no-smoke-no-mirrors-the-dutch-pension-plan.html?_r=0

    Spension, thank you for the link. I think that’s a GREAT article!

  25. Brody s Says:

    Cappy
    Lol u truly misunderstand the power of a bk judge. But no mind.
    Lol is all I can say about rumors that some unknown union may lobby to outlaw bk. That is more blog nonsense.
    Have a super day!

  26. SeeSaw Says:

    Lockyer’s exact words:

    “Well, the state legislature can close that door,” Lockyer said.

    Lockyer is the one who brought up the subject. He is the one who planted the seed.

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