CalPERS will get its due from bankrupt cities
Troubled municipalities pare budgets but continue to pay pension fund
By Randy Diamond | July 23, 2012 12:01 am
CalPERS likely will still get its contributions from three California municipalities filing or planning to file Chapter 9 bankruptcy.
City council members in San Bernardino voted on July 18 to file bankruptcy in the next 30 days, joining Stockton, which filed for bankruptcy protection on June 28. Both cities have been affected by a slumping California economy and real estate downturn, but they also cite rising pension payments to the $229.8 billion California Public Employees' Retirement System as part of the reason for their bankruptcy filings.
Yet officials in both cities say they plan to continue their payments to CalPERS.
And the town manager in the High Sierra resort community of Mammoth Lakes also will continue that municipality's normal pension payments to CalPERS. The town's bankruptcy filing was the result of a $43 million judgment in favor of a development company after the town cancelled a contract for a mixed-use project.
San Bernardino will pay $25.5 million to CalPERS this year to cover pensions for its public safety and municipal workers — almost twice what the city paid in 2006. But even with the 2012 payments, it still owes CalPERS $142 million in future payments scheduled to be paid over the next two decades.
Total yearly payments from San Bernardino to CalPERS and the amount of its unfunded liability are both expected to increase after CalPERS recalculates local government contributions based on the state pension fund's 1% investment return for the 12 months ended June 30.
Gwendolyn Waters, San Bernardino's acting assistant city manager, cited the rise in pension costs as one of the major factors that influenced the city's announcement on July 10 that it would file for bankruptcy.
“However, (Cal)PERS retirements are a commitment that this city made and we hope to continue to meet all of our commitments,“ she said in an e-mailed response to questions. She said, however, that no final decision had been made regarding CalPERS or on any other aspect of the bankruptcy plan.
Ms. Waters said San Bernardino will file for bankruptcy in the next several weeks.
Stockton officials, who declared bankruptcy on June 28, have been more definite on their commitment to CalPERS. Connie Cochran, city spokeswoman, said Stockton plans to continue to preserve pension benefits for employees. She pointed to the city's reorganization plan that proposes massive cuts in retiree medical benefits, rather than making reduced payments to CalPERS.
“Reducing payments to CalPERS could have immediate direct impacts on current and former employees and would make recruiting and retaining qualified staff nearly impossible,” according to the plan.
Stockton is scheduled to pay $29.5 million to CalPERS to cover municipal and public safety employees. It also owes CalPERS another $147.8 million over the next two decades because of the increased unfunded liability that resulted from CalPERS' meager investment return.
In Mammoth Lakes, Town Manager David Wilbrecht said the town will continue making payments to CalPERS as part of its financial reorganization plans, adding that the town has an obligation to its workers and CalPERS. “We are committed to honoring our contract with CalPERS,” he said.
The community will play CalPERS approximately $1.7 million this year. It lists CalPERS as its second-largest unsecured creditor, estimating it owes the retirement system at least $4.2 million in long-term unfunded liabilities. Brad Pacheco, CalPERS spokesman, said Mammoth Lakes is in a pooled arrangement with other communities and the retirement system is expecting to calculate a specific unfunded liability for the community in the fall.
CalPERS provides pension benefits for municipal workers in many communities in California as well as for state employees, some school district employees and those employed in other California government entities.
Along with their contractual commitments to CalPERS, another reason to continue the pension contributions is that to do otherwise would entail a long and costly legal battle. CalPERS officials have maintained that retirement benefits already earned by workers are sacrosanct.
“We believe current employees and retirees have a vested right to accrued benefits,” Mr. Pacheco said in a statement.
Mr. Pacheco would not comment on what would happen if a municipality challenged the retirement system except to say that CalPERS wanted to work with communities. Mr. Pacheco said that employers that contract with CalPERS have the ability to change the benefits for future employees, subject to collective bargaining.
So far, no municipality has ever challenged in court CalPERS' stance on the pension rights of current employees.
When the City of Vallejo, Calif., filed for bankruptcy in 2008, it laid off city workers and cut city services but did not challenge existing city workers' CalPERS benefits. New contracts worked out with labor unions during the bankruptcy process increased the pension contributions made by most employees and lowered pension benefits for some new hires.
Vallejo still owes CalPERS $195 million in contributions.
Lawyers involved in municipal bankruptcies say that ultimately they expect a court challenge against CalPERS' claim that pension benefits are a contractually iron-clad right.
“In the right case, the debtor will take on the issue,” said Kenneth Klee, a law professor at the UCLA School of Law in Los Angeles.
Ultimately, that case will involve a municipality being forced to make a choice between maintaining essential services such as police or fire protection or paying pension benefits, said Mr. Klee.
“No one wants to sue CalPERS if they don't have to, but there will come a case when there is not a choice,” he said.
Michael Sweet, a bankruptcy attorney at Fox Rothschild LLP, San Francisco, agreed that ultimately some municipality will take on CalPERS, which he described as “the 800-pound gorilla”. He said it could occur sooner, rather than later.
“So far everyone is agreeing to pay, but when you get down in the trenches in these bankruptcy cases, you never know what is going to happen,” he said.
Mr. Sweet said Stockton made a pragmatic decision to cut retiree health benefits and anger former workers rather than take on existing workers as well as CalPERS.
Both Stockton and San Bernardino have suffered from huge tax losses caused by property foreclosures and declining house prices. Ironically, however, part of the reason both communities are in trouble is that they floated pension obligation bonds to help them meet their CalPERS debt.
Stockton issued $125 million in pension obligation bonds in 2007 to help build its reserves to pay CalPERS, but the money it received from the bond sale was put into investments that lost more than 20% the following year. CalPERS also suffered a 24% loss in the 12-month fiscal year ended June 30, 2009, meaning that Stockton and other cities had to increase payments to the retirement system.
Stockton estimates in its bankruptcy filing that it has a $26 million general fund deficit. It has said as part of its reorganization it wants to eliminate $12 million in annual debt payments, including $5.8 million for the pension bonds.
San Bernardino also issued $50.4 in pension obligation bonds in Oct., 2005. But the city now has a $45 million budget deficit and must pay $3.4 million a year to investors who purchased the bonds. The city has $48.6 million in pension bonds outstanding.