For government workers across California nervous about their retirement benefits, Stockton’s bankruptcy plan would seem like cause for relief: The city says it will leave pensions untouched and will continue making all its required payments to CalPERS.
But Stockton’s plan, approved by the City Council last week, is hardly the last word in the debate over whether local governments can legally cut employee pensions to reduce their financial burden.
The issue is still alive in San Bernardino, which is muddling through its own bankruptcy case and whose mayor just called CalPERS costs a “monster,” and Vallejo, which survived bankruptcy two years ago without tackling pension costs but is now making noises about picking a fight. Meanwhile, the mayor of San Jose is pushing a statewide ballot initiative to give municipalities broad powers to reduce benefits.
Bottom line: With governments coping with a sluggish economy, public pensions remain a hot topic. CalPERS, still recovering from huge investment losses incurred in the 2008 crash, is demanding higher contributions in the coming years. Costs are going up in spite of a reform law signed last year by Gov. Jerry Brown.
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Even in Stockton, the issue remains on the front burner. The city’s plan to exit bankruptcy depends on voters approving a 3/4-cent sales tax increase, and opponents have pounced on the city’s refusal to fight CalPERS.
“Pensions are burning a hole in the budget of the city,” said Stockton businessman Dean Andal, a former Republican congressional candidate and a critic of the November ballot measure. “This tax increase will be eaten up by pension benefits.”
Until recently, public sector pensions were considered sacred. When Vallejo considered slashing benefits after going bankrupt in 2008, it backed down after CalPERS warned that pensions were guaranteed by the state constitution.
Now the idea of an ironclad pension is under siege. A bankrupt Rhode Island city pressured retirees into taking a 25 percent cut in benefits two years ago. Detroit, the newest member of the bankrupt cities club, has spoken of drastically cutting pensions.
In California, after CalPERS’ annual cost to the state budget surpassed $3 billion, the Legislature passed a law cutting pension costs, mainly at the expense of newly hired workers. But some politicians and activists said lawmakers didn’t go far enough. They saw Stockton’s and San Bernardino’s Chapter 9 bankruptcies, filed barely a month apart last year, as an opportunity to use the bankruptcy code to reduce benefits for current workers and retirees.
These advocates found allies on Wall Street. Insurance companies that insured the two cities’ bonds – and stood to lose millions – demanded the California Public Employees’ Retirement System be treated the same as everyone else.
An epic legal battle loomed. Would pensions be protected by the state constitution? Or would federal bankruptcy law – where debts are routinely canceled or restructured – prevail?
CalPERS, the largest U.S. public pension fund, dispatched its lawyers to Bankruptcy Court to argue for keeping the money coming. Portrayed by critics as an unsympathetic bully willing to bleed cities for their cash, CalPERS insisted it is simply trying to keep the system healthy.
“It is important to remember that there is no ‘us’ and ‘them’ in providing retirement security for public employees,” said CalPERS spokesman Brad Pacheco in an emailed statement. “It is a shared responsibility that we and our partners take very seriously.”
Stockton sided with CalPERS, despite a tab that costs the city $29 million a year, according to figures provided by the pension fund.
City Manager Bob Deis said slashing contributions would mean an almost complete breakdown of the city’s contractual relationship with CalPERS, translating into a two-thirds reduction in benefits. Most retirees earn pensions of about $24,000 a year, but many recent retirees get more than twice as much because of “pension spiking” and other factors. With retirees already losing city-funded health care, Deis said lower pensions would cause an “exodus” of employees.
The big showdown fizzled. The bond creditors backed down. One company agreed to take a loss of up to 12 percent, forfeiting millions in debt repayment. Another company agreed to delayed repayments and, under a convoluted plan, will take possession of a new city office building it financed.
Why compromise? In part, because the insurers weren’t hammered too badly. The plan “is not that significant a haircut,” said Karol Denniston, a San Francisco bankruptcy lawyer representing a group of Stockton taxpayers.
Another factor was anxiety. Denniston said the companies weren’t certain they could beat CalPERS in court.
Indeed, no one knows how the courts would rule on this issue. While many analysts say the bankruptcy code would trump California’s constitutional protections for pensions, the question has never been decided in court, said David Skeel, an expert in municipal bankruptcy law at the University of Pennsylvania.
San Bernardino has seemed willing to test the issue.
Unlike Stockton, the city so far has lumped CalPERS in with other creditors. For several months last year, it stopped making its pension contributions. It resumed paying CalPERS in July but still owes $15 million in back payments, Pacheco said.
What happens next is unclear. In late August, Mayor Pat Morris told the San Bernardino Sun he expected the city to make good on its obligations to CalPERS, which total around $25 million a year. But earlier this week, he took a tougher line during his State of the City address, blaming pensions for the city’s “nightmare.”
“The giant whale in the general fund deficit that eats the city’s services and destroys the city’s financial viability is public employee pensions and related benefits paid into (CalPERS),” he said, as reported by the Sun. “The growth of this monster goes back many years as the public unions acquired control of this city’s political process with their political action committees.”
For now, the city’s plans are a secret. The City Council approved an outline of the city’s reorganization proposal Monday, but the vote was taken in closed session and the plan will be kept under wraps while city officials negotiate with creditors through court-sanctioned mediation.
“I have no idea how long the mediation process will take,” City Attorney James Penman told The Bee. “We have a great deal to mediate, obviously.”
In Vallejo, some officials wish the city confronted CalPERS over pension costs when the city went bankrupt in 2008.
Although the city is out of bankruptcy, it’s running a $5 million deficit this year. The city’s annual contribution to CalPERS has risen from $10.4 million in fiscal 2011-12 to more than $14 million this year, according to city records. In five years, it’s projected to top $18 million.
Vice Mayor Stephanie Gomes said the city erred when it knuckled under to CalPERS and didn’t attempt to reduce pension expenses.
“We failed bankruptcy when we did not make the cuts to our contracts,” she said. “If you’re going to go bankrupt, do it with strong political will – rip off the Band-Aid when you can.”
Gomes said she favors the statewide ballot initiative unveiled recently by San Jose Mayor Chuck Reed, a Democrat who led a successful initiative last year to curb his city’s pension costs.
While the San Jose law is on hold because of a court challenge from labor, Reed has proposed a statewide initiative on pensions. This plan would amend the state constitution to give governments the authority to trim benefits promised to employees already on the payroll.
Gomes said cities need that kind of power.
“That’s really where it’s going to happen,” the Vallejo vice mayor said. “It’s pretty difficult for individual cities to do it, and the Legislature has been unwilling to do it.”