Vallejo first to test no pension cut in bankruptcy

What happens when a bankrupt city does not cut its largest debt, pensions, is getting its first test in Vallejo, which has higher average pensions and higher CalPERS rates than the two larger cities still in bankruptcy, Stockton and San Bernardino.

Vallejo was the forerunner, choosing not to try to cut pensions before exiting a 3 ½-year bankruptcy three years ago. City council members said later CalPERS had threatened a long and costly legal battle.

Stockton’s plan to exit bankruptcy without cutting pensions was approved in October. The judge ruled that CalPERS pensions can be cut in bankruptcy. But Stockton does not want to cut pensions, saying they are needed to be competitive in the job market.

San Bernardino, cash short, skipped payments to CalPERS for most of a fiscal year. Last month the city formally announced that under an agreement with CalPERS last June, the missed payments are being repaid and pensions will not be cut in bankruptcy.

So, will the bankrupt cities regret passing up a chance to cut growing pension costs that take funds needed for other services?

A leader among the critics of public pension cost reporting, credit-rater Moody’s, warned in February that the failure of the three bankrupt California cities to cut pensions risks a return to insolvency.

Vallejo may be a good post-bankruptcy test not only because it was first in and first out, but also because of its high pension costs. Here are some comparisons of the three cities from several sources.

Retirees of Vallejo, population 117,000, have higher average pensions than the retirees of the two larger cities, San Bernardino 214,000 and Stockton 300,000. One reason: Union bargaining was based on pay in the high-cost San Francisco Bay Area.

The latest CalPERS valuation reports show police and firefighters retired less than five years have an average pension of $95,127 in Vallejo, compared to $85,501 in Stockton and $78,673 in San Bernardino.

The average pension and benefit amount for retirees with 30 plus years of service in Vallejo is $83,938 in Vallejo, $66,286 in Stockton and $63,418 in San Bernardino, according to a database of government pay and pensions, TansparentCalifornia.com.

Of the individual pensions listed by name in the database, 13 percent (87) of Vallejo retirees have an annual pension of $100,000 or more, compared to 7.4 percent (130) of Stockton retirees and 5.9 percent (83) of San Bernardino retirees.

The rate that Vallejo pays CalPERS is significantly higher than the rates paid by the other two bankrupt cities. The Vallejo safety rate (police and firefighter), 57.6 percent of pay next fiscal year, is projected by CalPERS to reach 72 percent of pay in 2021.

Last week a Moody’s report said the San Bernardino no-cut pact with the California Public Employees Retirement System makes it more likely that the city will cut bond debt and retiree health care, following the Vallejo and Stockton pattern.

“San Bernardino’s choice to leave its accrued pension liabilities unimpaired means that its contribution requirements to CalPERS (see Exhibit 2) will likely increase to the point where they weaken the city’s financial profile, even after the relief provided by the bankruptcy adjustment,” said Moody’s. “This weakening is similar to what we expect to occur in both Stockton and Vallejo.”

Moody's

If growing pension and retiree health care costs continue to eat up more of government budgets, diverting money as public safety services and other key programs erode, is there a point at which leaders and the public demand change?

When San Diego and San Jose voters approved cost-cutting pension reforms in June 2012, retirement costs were 20 percent or more of the general fund in the two big cities that have their own pension systems.

The Vallejo budget is complicated by separate accounting for a one-cent sales tax approved by voters in November 2011 for 10 years. Measure B was expected to yield about $10 million each year.

In a five-year forecast in the current Vallejo budget (p. 20) excluding Measure B, the annual CalPERS payment, 17.6 percent of the general fund ($13.8 million of $78.5 million), is expected to grow to 21.8 percent by 2019-20 ($17.4 million of $80 million).

The Stockton plan to exit bankruptcy expects the city’s CalPERS contribution to climb to 18.5 percent of the general fund by the end of this decade, then to stay at that level for most of the next decade.

Since leaving bankruptcy, Vallejo has made a supplemental $6.6 million payment to CalPERS to cut pension debt, started pension-like annual investments to help pay future retiree health care, and has begun building a large general fund reserve.

Vallejo has received national media attention for “participatory budgeting” that allows residents to vote on how some of the Measure B sales tax money will be spent, about $3 million the first year.

In a general fund update for the city council last month, the Vallejo city manager, Daniel Keen, listed a number of “nice milestones,” beginning with the first structurally balanced city budget in 10 years.

The city received its first unqualified audit in over seven years, re-entered the debt market with an $18 million water bond, and debt issued in 1999 was recently upgraded from “CCC+” to “BB-” with a stable outlook.

Through the first quarter of the fiscal year that began July 1, tax revenue is $2 million above projections. But $2.5 million in expected savings from unfilled positions dropped to $1 million due to a “very good job” hiring police and firefighters.

“In our five-year projections we had expected that number to come down,” Keen said. “It’s just coming down a lot sooner than we thought it would.”

Vallejo made deep cuts in police and firefighters and closed several fire stations. The current budget called for hiring 18 police officers, two dispatchers, 10 police cadets, 10 firefighters and one deputy fire chief.

A budget chart (p. 165) shows the average Vallejo police salary, $111,016, is more than matched by pension, health care, workers compensation and other expenses that push the total cost for the average officer to $227,221. (See chart below)

The city’s first structurally balanced budget in a decade may be temporary. The five-year forecast expects a general fund deficit to reopen again next fiscal year and grow to $3 million by 2019-20.

“There is still a lot of work to do,” Mayor Osby Davis told the council. “There is still a lot of watching dollars and planning that we have to undertake. Until we see that balanced throughout, we are not out of the woods.”
Vallejo
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 1 Dec 14

7 Responses to “Vallejo first to test no pension cut in bankruptcy”

  1. Tough Love Says:

    Police worker’s Compensation costs of $29,402’$111,016= 26.5% of pay ?

    Is this the Premium for the coverage, something else? That cost is shocking?

  2. spension Says:

    The pension contribution *alone* is quite near the median household income for Californians.

  3. Michael C Genest Says:

    I noted with interest the use of the term, structural balance. For what it’s worth, here are 4 types of “balance”:

    1. Annual, but phony. The published numbers leave at least a small reserve for the year, but are highly improbable. (Most of the Schwarzenegger budgets fit this).
    2. Annual. The published numbers leave at least a small balance and they are likely to pan out. But, to get that balance they have to rely on carry-forward balances from the prior year, so they actually spend more in the year than they take in during that year. (Most of our governors for the last few decades have managed to enact a few budgets that fit this).
    3. Structural. The budget is balanced on an annual basis, but also spends less than it takes in during that year. (Brown’s last couple, i.e., post-P30, budgets fit this).
    4. Long-term. Even though the budget may achieve structural balance, that is not likely to hold up in the future due to built-in cost growth that almost certainly exceed revenue growth expectations in the long run, often associated with unfunded liabilities or entitlements. (California’s budget has not fit this to my recollection for decades, probably since before P13).

  4. John Moore Says:

    An excellent analysis. CaLPERS has changed the method for charging public entities for unfunded liabilities. Beginning 2015-16, each entity in a pool will receive a debit or credit depending on liabilities instead of salaries(for its share of unfunded liabilities). Cities that reduced the number of employees or contracted for services will be charged for the share of the unfunded deficits left by those employee reductions. Here in Pacific Grove, which has greatly reduced the number of employees, the change will cost about an extra $625,000 a year. That is three times larger than the entity in the pool with the second largest charge based on liabilities. It is a huge increase for the small residential community.

    Ed, consider a follow-up analysis based on the CaLPERS 2015-16 contribution estimates for the three cities.

  5. Bille Says:

    I want to thank Ed for pointing this out. However, I think the real story here is on the same page he points to for officer pay and benefits. THE CITY MANAGER is paid nearly $350,000 with the Assistant close behind for a city of 120,000 residents!? The 2nd highest paid city manager in California according to SFGATE in 2010! Before the big raises… Of course, that is with City of Bell out of the count. The city of San Ramon with 58,000 has the highest paid. San Francisco and San Jose with populations and complexity outnumbering all the other top 20 combined, are ranked 7th and 14th respectively.

    Time to wake up residents and take back your government before you end up paying the city clerk $500,000 plus employer paid member contributions, a car allowance, housing allowances, loans and expense accounts.

    http://www.sfgate.com/bayarea/article/20-city-managers-in-state-paid-over-300-000-3173603.php

  6. Bring Back the WPA Says:

    “makes it more likely that the city [San Bdno] will cut… retiree health care, following the Vallejo and Stockton pattern.”

    The dark conspiracy is revealed: Governments will routinely eliminate health care for retirees, resulting in a decline in their health and ultimately shorter lifespans. The desired reduction in pension payouts are achieved.

  7. Stuart Mill Says:

    Bill, In my central valley community where the average household income is less than $30000, the city clerk makes $156000 on the at to $500000.

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