Why Fresno avoided bankruptcy, unlike Stockton

At a time when some are calling soaring state and local government pension debt a crisis, there is a notable outlier. The Fresno city pension system has been fully funded for at least a decade and last year projected a $289 million surplus.

The main reason Fresno pensions have remained fully funded: The city’s public employee unions have accepted comparatively low retirement benefits, a particularly important concession by the police and firefighters who are a big part of the budget.

When another Central Valley city, Stockton, declared bankruptcy four years ago city officials said they would not cut the largest debt, a $211 million pension “unfunded liability,” because attractive retirement benefits are needed to remain competitive in the job market.

Stockton’s decision to cut only bond debt, despite a federal judge’s landmark ruling that CalPERS pension debt also can be cut in bankruptcy, was contested by two national bond insurers and a major bondholder, Franklin.

Not having a large pension debt to pay off helped Fresno cope with budget deficits during the recession. Speaking to the Bond Buyer last August, Mayor Ashley Swearengin recalled Time magazine mentioning Fresno as a possible bankruptcy.

Swearengin

Swearengin

Moody’s did not give Fresno bonds a hard-earned upgrade from a junk rating until last summer. Nearly a dozen rounds of painful quarterly budget cuts, begun early in the recession, left Fresno with a depleted workforce as the city struggled to close budge gaps.

“We had 4,100 employees and now we have 3,300,” Swearengin told the Bond Buyer. “Of those jobs, only 200 to 300 were layoffs. The rest were people who left, retired, or positions that had been held vacant, but were funded.”

The Fresno pension systems, never falling below 100 percent funded on an actuarial basis, continued receiving required employer-employee contributions during the recession, a timely addition to pension fund investments as the stock market began a major bull run after the bottom in 2009.

“In some people’s minds the city might have landed in bankruptcy if the city management and the unions hadn’t agreed on the incredibly hard step of instituting layoffs and freezes to keep the city functioning,” Robert Theller, Fresno Retirement Systems administrator, said last week.

Theller attributed the fully funded pensions to low payouts, unions that disagree with management on some points but are generally cooperative, good timing on a $152 million pension obligation bond in 2002, and conservative pension boards that invest carefully.

“It’s a well-run ship, and it has been for many decades,” said Theller, one of the reasons he was excited about taking the post last January.

Fresno Police & Fire Retirement System funding level

Fresno Police & Fire Retirement System funding level

Fresno city pensions can seem at odds with conventional pension wisdom. The investment earnings forecast is 7.5 percent, which critics usually contend is overly optimistic and conceals massive debt.

Recruitment and retention of Fresno city employees is not said to be a serious problem, even though retirement benefits are well below those offered by the Fresno County pension system, deep in debt with a $1 billion unfunded liability.

Like the large coastal cities, Fresno, the largest Central Valley city (estimated 2015 population 520,052, Sacramento 490,712), has independent city and county retirement systems that are not part of CalPERS, the giant California Public Employees Retirement System.

The rare Fresno city pension surplus was reported last March by Robert Fellner of Transparent California, a searchable public data base that lists the pay and pensions of individual state and local government employees and retirees.

Fellner said the average Fresno city pension for a police or firefighter with 30 years of service was $70,627 and the average pension for other (non-safety) 30-year city employees was $39.644.

In comparison, he said, the average Fresno County pension for a non-safety employee with 30 years of service was $61,513, more than 50 percent higher than the pension of a similar city employee.

“Fresno County will spend a staggering 52 percent of pay on retirement benefits, which is over triple the 16 percent rate that Fresno City pays, and over 17 times more than the 3 percent that the median private employer spends on employees’ retirement accounts,” Fellner reported.

The city and county both provided average full-career pensions that exceeded the average pay, $36,975, of private-sector workers in Fresno County, Fellner said, according to 2014 data from the U.S. Bureau of Labor and Statistics.

On the same day last month, Oct. 25, Fellner’s Fresno report was featured on Fox television news, while an academic newsletter distributed a study that found the Fresno County pension system led the nation in eating up county budgets.

The study by the Center for Retirement Research at Boston College used its own methodology to compare the percentage of “own-source revenue” (excluding transfers from state or local government) taken by pensions, retiree health care, and debt service.

Fresno County ranked No. 1 (see chart below), in a nationwide sample of 178 counties, with pensions taking 57.1 percent of own-source revenue, retiree health care (OPEB) 0 percent, and debt service 4.5 percent.

In an email response to a request for comment on the study, the Fresno County Employees Retirement Association said it “does not control, create, or negotiate benefit formulas” and “continues to have the ability to provide guaranteed retirement benefits.”

Fresno ranked No. 33 in the study, among a nationwide sample of 173 cities, with pensions taking 8.9 percent of own-source revenue, retiree health 2.2 percent, and debt service 7.1 percent.

The president of the Fresno Police Officers Association, Jacky Parks, said last week the low city pensions have had an impact on recruiting and retention. For example, he said, a “lateral transfer” from an employer in CalPERS can be difficult for several reasons such as differences in “pensionable pay.”

Jacky Parks

Jacky Parks

CalPERS sponsored legislation, SB 400 in 1999, that gave the Highway Patrol a “3 at 50” pension formula providing 3 percent of final pay for each year served at age 50, capping the pension at 90 percent of pay.

Critics say the costly “3 at 50” formula, widely adopted by large local governments, is “unsustainable” and a major cause of pension debt. Fresno offers a “2 at 50” formula increasing to 2.7 percent at age 55, capped at 75 percent of pay.

Parks said Fresno also has a DROP plan that allows officers to earn a retirement benefit comparable to the “3 at 50” formula. He said most officers enter the DROP plan at age 50, limiting them to no more than 10 additional years on the job.

(The Deferred Retirement Option Program freezes the pension earned at that point. The pension amount, plus COLAs and interest at a rate approved by the pension board, goes into a special account until the employee leaves the job.)

Parks said Fresno officers are “proud we have a solvent system” and are aware that “everyone is a little worried” about the financial condition of the Fresno County retirement system.

“The philosophy of our (pension) trust is that you need to be financially responsible so this is going to be forever, so the next guy that gets here doesn’t need to worry,” Parks said.

crc-chart

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 7 Nov 16

14 Responses to “Why Fresno avoided bankruptcy, unlike Stockton”

  1. john m. moore Says:

    This is an excellent article.
    It debunks several anti-pension reform myths, especially regarding recruitment and peer salaries.
    Unfortunately, it would be difficult for a city or a county with a large unfunded deficit to attempt to solve its deficit problems by imitating the City of Fresno, because of PEPRA(allows a max pension of $140,000 if no SSec.) Also, the new “fact finding” guffaw makes it very difficult to reduce salaries.
    Yet, if an agency elected a majority of bona fide pension reformers to its legislative body, and assuming competent legal advice, reform is possible on an agency by agency basis, but will never happen by a state wide initiative because local legislative bodies simply would not enforce it. Note how Marin and Sonoma ignored grand jury reports that proved beyond
    a shadow of a doubt that hundreds of millions in pensions had been acquired corruptly, not a single vote to remedy the theft.

  2. Tough Love Says:

    Quoting ….

    ““Fresno County will spend a staggering 52 percent of pay on retirement benefits, which is over triple the 16 percent rate that Fresno City pays, and over 17 times more than the 3 percent that the median private employer spends on employees’ retirement accounts,” Fellner reported.”

    While the CITY of Fresno may be in better shape (pension-wise) than others, unless their workers earn in “wages” less than comparable PRIVATE Sector workers, there is ZERO (yes ZERO) reason for the City’s taxpayers to contribute 16% of pay into those worker’s retirement accounts when the typical Private Sector City taxpayer only gets 3% in such contributions form their own employers.

    Do we not have better and more appropriate uses for Tax revenue than unnecessarily over-compensating Public Sector workers ?

    Public Sector workers are NOT ‘special” and deserving of a better deal …on the Taxpayers’ dime.

  3. CalPERSon Says:

    City of Fresno is a Defined Benefit system. This proves that DB plans are sustainable and can be made to work, and thoroughly debunks the argument that public pensions must be DC or 401k to remain solvent.

  4. SeeSaw Says:

    TL you must accept the fact that the public and private sectors do not compare the salaries of their, respective, workers. It is apples and oranges. We have very important issues to deal with in this country. No one is going to die if separate groups of rank and file are not all paid the same.

  5. Tough Love Says:

    Fresano City’s Police pension of 2.7%@55 PLUS a DROP Plan for which retiring officer can remain for TEN years while they collect a paycheck AND a pension is ENORMOUSLY expensive.

    Using the SAME valuation assumptions and methodology that the US Gov’t REQUIRES of Private Sector Plans, such a COLA-increased pension certainly costs no less than a level annual 50% of pay to fully fund over the Officer’s working career.

    This Police Plan …. as described …. will ABSOLUTELY blow up in the faces in the coming years.

  6. S Moderation Douglas Says:

    Reports of my dearth have been greatly exaggerated..

    Apparently in Fresno, DROP is also available to non safety employees, who are also covered by neither Social Security nor employer paid retiree healthcare.

    Imagine, their retirement system has been fully funded all these years without the advice or consent of Tough Love.

    What do that tell you?

  7. Tough Love Says:

    SMD,

    “Fully funded” using (the 7.5% CA interest rate) PUBLIC Sector assumptions is equivalent to 2/3-rds funded using the assumptions and methodology used by Canada, Europe, Scandinavia, and REQUIRED by the US gov’t for use by the Private Sector in the USA.

  8. S Moderation Douglas Says:

    According to Transparent California, the City of Fresno is fully funded because their benefits are “comfortable, but not exorbitant”…

    Meanwhile, in Sonoma County, various articles claim the Sonoma County pension system is in crisis; so much so that they contemplate bankruptcy… And reducing pensions/increasing employee contributions.

    The following data is from…”More Pension Math”,
    Joe Nation, Ph.D.
    Stanford Institute for Economic Policy Research (SIEPR)
    February 21, 2012

    Average annual retirement benefit, safety

    Fresno. $51,684 Sonoma. $48,768

    Average annual retirement benefit, miscellaneous

    Fresno $24,720 Sonoma $28,680
    ……………………………………..
    Member contribution rates, safety…
    Fresno 8.37% Sonoma 12.36%

    Member contribution rates, miscellaneous…
    Fresno 8.74% Sonoma 12.2
    ……………………………………..
    Employer contribution rates, safety…
    Fresno 23.94% Sonoma 22.86

    Employer contribution rates, miscellaneous…
    Fresno 10.21% Sonoma 15.4%
    ……………………………………..
    According to Josh Rauh in “More Pension Math”, the 2011 funded ratios on a market value basis, using a uniform funded ratio and a risk-free discount rate, were…
    Fresno miscellaneous… 78%
    Fresno safety… 77%
    Sonoma County… 65%

    It appears that Sonoma pensions are no more exorbitant than Fresno. So perhaps we should look elsewhere for the lower funded status there.

    Robert Theller attributed the Fresno fully funded pensions to low payouts… AND good timing on a $152 million pension obligation bond in 2002, and conservative pension boards that invest carefully. Perhaps Sonoma County had less than good timing with their (larger) POBs.

  9. S Moderation Douglas Says:

    Tough Love says…

    “Fully funded” using (the 7.5% CA interest rate) PUBLIC Sector assumptions is… yadda, yadda, yadda. ”

    Don’t shoot the messenger. That was Ed Mendel, quoting Robert Fellner.

  10. Tough Love Says:

    Quoting SMD ………..

    “According to Transparent California, the City of Fresno is fully funded because their benefits are “comfortable, but not exorbitant”…”

    Based on my reading of this article, that statement is likely true for non-safety workers, but certainly NOT for Safety workers. A 30 year of service 2.7%@55 COLA-increased pension together with a 10-year DROP Plan is EXTRAORDINARILY generous …. and hence VERY costly.

  11. S Moderation Douglas Says:

    Well, now you’ve ruin’t the whole story. First you say they aren’t really fully funded. Now you say they aren’t even “comfortable, but not exorbitant”

    Next you’ll be telling little kids there is no Santa.

    John Moore says the article debunks several anti-pension reform myths, especially regarding recruitment and peer salaries.

    CalPERSon says it proves that DB plans are sustainable and can be made to work, and thoroughly debunks the argument that public pensions must be DC or 401k to remain solvent.

    Now Tough Love says it don’t debunk nothin’ because it’s apparently just bunk?

  12. Tough Love Says:

    SMD, Questions…

    (1) What are current Total (EE + ER) Police Plan pension contributions as a % of pay?

    (2) What WOULD THEY BE under valuation assumptions and methodology the the US Gov’t REQUIRES of PRIVATE Sector Plans?

    ———————————————————
    P.S. Do you think PRIVATE Sector Plans OVER-Contribute ?

  13. S Moderation Douglas Says:

    I think whatever they had invested in the stock market took a huge loss at 2:30 AM Eastern Time. Hang on to your hats, folks.

  14. Tough Love Says:

    SMD,

    WIth a Republican Congress (BOTH houses) and a Republican President, what are the odds of ANY sort of Federal Bailout of failing Public Sector pension Plans ?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: