Why bankrupt San Bernardino didn’t cut pensions

After reaching agreements with all major creditors, San Bernardino is moving toward an exit from a four-year bankruptcy this fall without cutting public pensions, its largest and rapidly growing debt.

Last week U.S. Bankruptcy Judge Meredith Jury, saying the end is “in view,” scheduled another hearing June 16, when she plans to set a date for a hearing to confirm the exit plan, probably about 90 days later.

San Bernardino follows the path of previous bankruptcies in Vallejo and Stockton by limiting the main cuts in long-term debt to bonds and retiree health care, while raising taxes, slowly rebuilding reduced services, and leaving pensions untouched.

Now the prospect of cities and other local governments using bankruptcy to cut pensions or to get leverage in bargaining, which alarmed unions after Vallejo filed in 2008, may be fading as a pattern seems to be emerging.

Of the three cities that filed recession-era bankruptcies, San Bernardino had by far the strongest case for cutting pensions. The poorly managed city somehow seemed surprised to find that it was running out of cash and in danger of not making payroll.

Judge Jury

Judge Jury

After an emergency bankruptcy filing in August 2012, San Bernardino took the unprecedented step of skipping its legally required pension payment to CalPERS for the rest of the fiscal year, running up a tab of $13.5 million.

The California Public Employees Retirement System had grounds to cancel its contract with San Bernardino, likely resulting in pension cuts. But in mediation San Bernardino agreed to repay CalPERS with interest, $16 million, plus a $2 million penalty, all but $500,000 of which pays down city pension debt.

Part of the agreement announced in June 2014 was that the San Bernardino exit plan would not attempt to cut pensions. Four months later, a federal judge in the Stockton bankruptcy issued an opinion that a CalPERS pension can be cut in bankruptcy.

But even if the opinion had been issued before the mediated agreement, a lengthy San Bernardino disclosure statement heard by Judge Jury last week suggests that the city would not have attempted to cut pensions.

The San Bernardino disclosure gave the same basic reason as Stockton for not attempting to cut pensions in bankruptcy: Pensions are needed to be competitive in the job market, particularly for police.

“The city concluded that rejection of the CalPERS contract would lead to an exodus of City employees and impair the City’s future recruitment of new employees due to the noncompetitive compensation package it would offer new hires,” said the San Bernardino disclosure.

“This would be a particularly acute problem in law enforcement where retention and recruitment of police officers is already a serious issue in California, and where a defined benefit pension program is virtually a universal benefit.”

Apparently for the same reason, a pension reform approved by San Diego voters four years ago switched all new hires to 401(k)-style retirement plans, except for new police who continue to receive pensions.

If San Bernardino ended its CalPERS contract, Gov. Brown’s pension reform could speedup the feared exodus. To avoid being classified as “new hires” getting lower pensions, police and others choosing to leave the city would have to find another employer in CalPERS or a county system within six months.

“The departure of City employees upon rejection of the CalPERS Contract could be massive and sudden,” said the San Bernardino disclosure, which would “seriously jeopardize” public safety and other essential services.

San Bernardino does not provide federal Social Security for its employees. To remain competitive in the job market with a pension plan, said the disclosure, the city has “no ready, feasible, and cost-effective alternative” to CalPERS.

If San Bernardino did leave CalPERS, the city would have to pay for some type of new retirement plan while paying for pensions already earned under the CalPERS plan. The disclosure said the city would face a “hypothetical termination liability” of almost $2.5 billion.

And there would be a major legal battle. During mediation, said the disclosure, CalPERS took the position that its contract with the city cannot be rejected in bankruptcy or modified to reduce pensions and give the city financial relief.

When U.S. Bankruptcy Judge Christopher Klein issued an opinion in the Stockton case that CalPERS pensions can be cut in bankruptcy, CalPERS shrugged: the opinion is not legally binding and not a precedent.

In the Vallejo bankruptcy, city officials said they considered an attempt to cut pensions in bankruptcy but were dissuaded by a CalPERS threat of a long and costly court fight, possibly all the way to the U.S. Supreme Court.

Unions responded to the Vallejo bankruptcy by obtaining legislation, AB 506 in 2011, requiring cities, before filing for bankruptcy, to go through a 60 to 90-day process to try to reach an agreement with creditors or declare a fiscal emergency.

Stockton went through the “neutral evaluation” process before filing for bankruptcy on June 28, 2012. A little more than a month later San Bernardino filed an emergency bankruptcy on Aug. 1, 2012.

Under the San Bernardino exit plan, annexation of the city and its fire department by the county fire district is expected to yield a $143 parcel tax. City firefighters transfer to the county retirement system with no reduction in pensions. The city would continue to pay for previously earned CalPERS pensions.

In exchange for no cuts in pensions, San Bernardino got an agreement with a federally appointed retiree committee to eliminate a $112 per month retiree health care subsidy, saving the city $411,250 this fiscal year.

The disclosure shows the total annual San Bernardino payment to CalPERS is expected to increase from $14.2 million last fiscal year to $28.9 million by fiscal 2023-24.

In the latest CalPERS valuation, the safety plan for police was 76.2 percent funded with a debt or “unfunded liability” of $162.6 million. The annual employer rate of 44.8 percent of pay next fiscal year was expected to increase to 57.8 percent by fiscal 2021-22.

The CalPERS plan for miscellaneous employees was 78.1 percent funded with a $109.7 million unfunded liability. The annual employer rate, 26 percent of pay next fiscal year, was expected to increase to 34.4 percent by fiscal 2021-22.

Some pension costs are reduced, said the disclosure, through increased employee contributions, lower pensions for new hires under the governor’s reform, and contracting with private companies for solid waste removal and right-of-way cleanup.

A big step toward an exit plan was an agreement with Commerzbank to pay 40 percent of a $51 million pension obligation bond, up from the original proposal of 1 percent.

The judge was told last week that the city also has an agreement with 23 retired police officers who receive a supplemental pension through a private firm, the Public Agency Retirement System.

“We are not Detroit, we are not Stockton,” Judge Jury said in her concluding remarks last week. “We came into this case in a very different posture than the other cities. And therefore, the fact that it has taken us this long to get to confirmation was to be expected.”

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 2 May 16

6 Responses to “Why bankrupt San Bernardino didn’t cut pensions”

  1. john m. moore Says:

    Filing a chapter 9 w/o modifying pensions is called a “suicide 9.” Per two separate Stanford analysis, particularly, that of Professor Rauh, pension plans like those in San Bernardino, Stockton et al will all go under within five to ten years. Add Sonoma, Marin, Pacific Grove and hundreds of other Agencies to that list.

    Why? Because CaLPERS and CERL Retirement bds. understate the size of unfunded pension deficits by a factor of 2.5 to 3 times. Applying fair market estimates of annual return on investments increases the true San Bernardino unfunded pension debt to about $486M. In addition San Bernardino police salaries are tied ro those of LA. Actual practice is proof that the Stanford experts are dead on.

    The main reason that police officers are scarce is because officers retire at such a young age(about age 54) instead of say 62. The chief in Salinas just announced that he is retiring at age 52 because he has his 30 years and so no incentive to continue, yet he will probably be replaced by a new chief, who is much older, but can double his or her annual pension by putting in a couple of years as chief at a much higher rate.

    In Ca., the unions and staff are power monopolies comparable to business trusts. Their biggest weapons are members of the media who print their spiels as if it was truthful. During bankruptcy Stockton had over 100 applicants for five police positions. When Bakerfield reduced police and fire pensions for new hires, it had over 100 appllicants for three spots. Hundreds of agencies have reduced safety pensions prior to PEPRA and have hired thousands under the lower 2%@50 benefit rate. Over 150 agencies never increased safety pensions to 3%@50.

    BTW, judge Kleins ruling may not be “precedent.” but his reasoning has been followed in other jurisdictions and supported by all scholars of Chapter 9. Mathematically, the current PERL and CERL pension systems are about 45% funded according to market rates. The pension crisis is the main survival issue for Ca., yet rarely an issue in state and local elections–a perfect storm for the agency staff and unions.

  2. Pete Echardt Says:

    Technical bk issues aside, these pensions are promises made for decades to humans who give up rights and working years to obtain the benefit of the arms length contract they made. Any court would be loathe to break the promise. These issues are axiomatic under the jurisprudence of equity and principles of estoppel…..the pension systems work, they are modified constantly to assure survival, this is a blog of whines… I have read it for years…….same old dull arguments……zzzzzzz

  3. S Moderation Douglas Says:

    “During bankruptcy Stockton had over 100 applicants for five police positions. When Bakerfield reduced police and fire pensions for new hires, it had over 100 appllicants for three spots.”

    Specious argument. In 2011, MacDonald’s had a nationwide hiring program for 60,000 positions. They had over a million applications. Are their pensions too generous?

    “The average number of people who apply for any given job: 118. Twenty-percent of those applicants get an interview.”

    ( 7 Things You Probably Didn’t Know About Your Job Search, Forbes.com, APR 17, 2013)

    It’s not uncommon for police or fireman hopefuls (or electricians, plumbers, et al) to apply for ANY available position to get a foot in the door. With experience and time they can hope to transfer to more desirable positions. Two of the purposes of a pension are to attract and …retain… qualified employees.

    “You must learn from other people’s mistakes. You can’t possibly live long enough to make them all yourself.”

    Sam Levenson

  4. Steve Says:

    And like clockwork, John Moore is first to chime in with his usual babble. First his attempt to convince Pacific Grove to roll back pensions goes down in flames, then his Mayoral candiacy finds him losing by an embarassing margin, recently his hoped for statewide initiative to attack pensions failed, and now bankruptcy has been removed from the table as an option to attack pensions.

    But, hey, maybe if John Moore steps away from posting comments all over the internets, he might be able to work on his golf game. At least there he has a semblance of a chance of being sucessful.

  5. Lynne V. Villalobos Says:

    What I see in our district is the mantra “No one qualified will apply if we cancel pensions. So these districts continue to vote to bankrupt their districts. The non-funded debt was a huge surprise to our district. Have you ever heard of a non-funded debt in your accounting 101? Our GM had been paying it for 6 months BEFORE it appeared on our radar. I want out of CalPERS. But how? Pay off 6-10 million? Not possible. Mr. Moore is NOT babbling. He is telling You the truth. San Bernadino knew that the unions would bankrupt them. But they were too weak to stand up to CalPERS. So now, they will have “to pay”: anyway. It used to be that government jobs were paid high benefits to make up for the fact that their pay was lower than the private sector. Not so anymore. They make more than anyone. And it will bankrupt California.

  6. S Moderation Douglas Says:

    Lynne V. Villalobos Says:

    “It used to be that government jobs were paid high benefits to make up for the fact that their pay was lower than the private sector. Not so anymore. They make more than anyone. And it will bankrupt California.”

    And other myths: Steven Greenhut (POLICE PENSIONS AND VOODOO ACTUARIALS 11/06/2009)

    On the often repeated claim that safety workers deserve earlier retirement because they have shorter life expectancy:

    “The next time you hear this “we die early” misinformation from a cop, firefighter or other public-safety union member (most of them probably believe it to be true, given how often they have read this in their union newsletters), send them to CalPERS for the truth!”

    It’s so often repeated, they may believe it to be true.


    It ain’t so. Just as “They make more than anyone.” ain’t so. No matter how many times you hear it, or read it (or write it), it still ain’t so. All the latest econometric studies show that state and local public sector workers, when compared to equivalent private sector workers, earn as much as twelve percent less in cash wages, on average. The only disagreement is whether the higher pensions and benefits are enough to compensate for, or overcompensate, for the lower pay.

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