For the second time in four months, CalPERS is preparing to slash benefits for a group of retirees whose former employer stopped cutting checks to fund their pensions.
The California Public Employees’ Retirement System could act next week to reduce pensions by as much 63 percent for 197 people who used to work for a defunct job-training program that was created by a group of local governments in Los Angeles County.
The agency, known as East San Gabriel Valley Human Services or LA Works, folded in 2014 when Los Angeles County suspended its contracts with the group over a billing dispute.
It stopped paying CalPERS when it disbanded even though its four original member cities are still in business.
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CalPERS wrote a letter to the cities in February asking them to make good on the debts LA Works owes to the fund.
“Our view is they have a moral and ethical obligation,” CalPERS General Counsel Matthew Jacobs told the CalPERS board in February. “They’re the folks who put this thing together, and it’s their employees essentially.”
The cities – Azusa, Covina, Glendora and West Covina – say they are not responsible for the debt because the LA Works joint powers authority was created in 1979 as a distinct organization outside of their control.
“While it is regrettable that the consortium has reached this point, its obligations to PERS are not the obligations of the city of West Covina,” wrote Kimberly Hall Barlow, an attorney for the city of West Covina in a Feb. 14 letter responding to CalPERS final request for payment.
The organization that used to be LA Works faces huge bills if it wants to fund completely the pensions of its former workers.
It could pay the $406,000 it owes CalPERS to catch up on its delinquent bills and then revive regular contributions to the pension fund. Or, it could pay a $19.3 million termination fee that CalPERS would invest in a low-risk pool to provide retirement security to the former workers.
Neither outcome appears likely, setting up a CalPERS vote on Tuesday, March 14, to reduce the pensions.
The decision follows a CalPERS vote in November to declare the Sierra County town of Loyalton in default and to reduce pensions for its handful of retirees. It was believed to be the first time CalPERS had cut pensions for one of its member organizations.
Loyalton faced a termination fee of nearly $1.7 million to fully fund the pensions of five former workers. Loyalton’s City Council chose not to pay the fee and it accepted the cut in benefits. The council then made up the difference with payments for its former employees.
Two other small organizations could soon follow LA Works and Loyalton. A February report from CalPERS said a Southern California nonprofit called the Independent Cities Association and the Niland Sanitary District in Imperial County also are delinquent on CalPERS payments.
“Here are prime examples of local elected officials setting up organizations that aren’t paying what they’re obligated to pay CalPERS,” CalPERS board member Richard Costigan said during a February report on organizations with delinquent pension payments.
Around the state, cities that belong to CalPERS have been raising alarms about rising pension costs since the retirement fund in December voted to shrink its projected investment rate. That decision reflects recent lower investment returns, and it means its member organizations will have to contribute more money to fund pensions for their employees.
Modesto this month, for instance, instituted a hiring freeze for this year partly because its mayor is concerned about swelling pension charges. San Luis Obispo also this month reported a projected deficit that its leaders attributed partly to pensions.