The city of San Bernardino’s Common Council on Monday approved a fiscal recovery plan to exit Chapter 9 bankruptcy that would repay CalPERS in full but only pay holders of the city’s $48.4 million outstanding pension obligation bonds about 1% as calculated on a present value basis.
San Bernardino filed for bankruptcy protection on Aug. 1, 2012. To conserve cash, the city suspended payments to CalPERS and other debtors. CalPERS and city employee unions unsuccessfully sued to block the city’s bankruptcy; the parties settled on June 9, 2014, with the city agreeing to repay CalPERS missed payments and resume making monthly payments.
Under the plan, the city would repay CalPERS close to $50 million it owes the pension fund, including $7.24 million in principal this fiscal year and next fiscal year, plus $400,000 in penalties and interest a year between fiscal year 2016 and fiscal year 2020.
Allen Parker, city manager, in a memo he co-authored to the Common Council, contended that even though the city plans to contract out city services, reducing future CalPERS obligations, “it is simply not realistic in the current statewide municipal environment to exit the defined benefit program for the remaining city employees.”
The $308.1 billion California Public Employees’ Retirement System, Sacramento, provides for reciprocity, which allows for employees to move from one local government to another local government in the state.
If the city were not a CalPERS member, it would “face a huge challenge in recruitment, which theoretically could be overcome only with significant additional salary or bonus compensation,” the memo said.
No other California city exited CalPERS, the memo said.
“The pension obligation bonds are an unsecured obligation,” Michael Busch, CEO at municipal consulting firm Urban Futures, a financial adviser for the city, told members of the Common Council when it voted for the restructuring plan.
When the city sold the non-rated pension obligation bonds in 2005, the city received short-term budgetary savings in return for paying more in later years, Mr. Busch said.
City officials anticipated then that the city would lose 1% of $50 million, which Mr. Busch called a “kicking the can down the road” approach.
Under the recovery plan, the city’s general fund saves about $3.5 million a year. At the same time, the city’s total debt service to pension obligation bond holders will increase to $4.6 million in fiscal year 2034 from $3.5 million in fiscal year 2016.