San Bernardino Plans to Cut Pensions of Retired Police Officers

police-badgeSan Bernardino’s plan to exit bankruptcy, possibly next year, cuts the pensions of 23 retired police officers who receive an unusual supplement to their regular CalPERS pension.

The supplement paid through a private-sector firm, the Public Agency Retirement System, boosts pensions to the same amount now common among police and firefighters, a standard set by the Highway Patrol in a CalPERS-sponsored bill, Senate Bill 400 in 1999.

San Bernardino provided the PARS supplement from 2004 to 2008, when the 23 police officers retired, as a lower-cost way to be competitive in the job market before adopting the more expensive CalPERS formula that critics say is “unsustainable.”

“PARS plan retirees will be the only retired employees in the state of California to have their retirement compensation reduced through bankruptcy proceeding,” a member of the PARS retiree subcommittee, Robert Curtis, said in a court filing this month.

Curtis said unfairly reducing pensions up to 12 percent could result in personal bankruptcy, the loss of homes and health coverage, and other hardships. He asked for a city-provided attorney to represent the PARS retirees.

San Bernardino’s plan to exit bankruptcy would reject the PARS contracts, distribute a $1.8 million trust fund to the 23 retirees, and make no more payments to the supplement, which is said to be underfunded by about $3 million.

The city thought it had an agreement with the PARS retirees last month. But in a court filing last week, the city suggested the emergence of opposition since then could result in even less generous treatment of the PARS retirees.

New public pension supplements, like the one given the 23 San Bernardino police officers, are now banned under a pension reform pushed through Legislature by Gov. Brown three years ago.

San Bernardino can argue that phasing out the PARS supplement leaves the 23 retirees with the pension offered when they were hired, like other officers who retired before the supplement began in 2004.

But the same cannot be said of pensions from the California Public Employees Retirement System and other public retirement systems covered by the “California rule,” a series of state court decisions.

Public pensions can go up but not down — even if, as with SB 400, a pension increase is retroactive, immediately creating debt because the increase was not paid for by previous employer-employee contributions.

A San Bernardino disclosure statement filed Nov. 25 said the city had roughly $323 million in CalPERS pension unfunded liabilities when filing for bankruptcy in 2012.

“These unfunded actuarial liabilties were created primarily by the common council’s decisions to approve enhanced pension benefits to city employees in 2001 and 2007,” said the city filing.

Contributing factors, said the filing, were unfunded retroactive pension increases, heavy CalPERS investment losses during the financial crisis, and an increasing number of retirees with larger pensions and fewer active workers to help pay for them.

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Without cutting pensions, the San Bernardino plan is expected to produce a healthy general fund reserve of 15 percent or more through 2034, according to an update issued by city consultants early this month.

U.S. Bankruptcy Judge Meredith Jury said in October she wanted more discussion of rising pension costs, given the “media perception” that Stockton and Vallejo are in trouble (strongly denied by the city managers) because they failed to cut pensions in bankruptcy.

San Bernardino has deeper problems than the other two cities: a lower average income and weak local economy, years of factional political infighting, and mismanagement that led to a new finance director discovering the city was on the brink of not making payroll.

After an emergency bankruptcy filing in 2012, San Bernardino took the unprecedented step of skipping its payment to CalPERS for most of a fiscal year, running up a debt of $13.5 million and risking termination of its CalPERS contract.

Hoping at first to get aid from CalPERS by stretching out payments, what San Bernardino got was a legal battle and a mediated agreement to repay CalPERS with interest by June 2016, followed by a penalty bringing the total to $18 million.

Regular San Bernardino general fund payments to CalPERS increased from $6 million in fiscal 2000-1 to a projected $22.6 million this fiscal year, said the November city filing.

CalPERS employer rates for San Bernardino police and firefighters were 14 percent of pay in fiscal 2000-1, 39 percent of pay in fiscal 2012-13, and are projected to be 60 percent in fiscal 2019-20.

In other developments, City Manager Alan Parker, who clashed with Mayor Carey Davis, resigned effective Dec. 31. Last week Police Chief Jarrod Berguan was appointed interim manager until Mark Scott, Burbank city manager, takes the post Feb. 8.

Burrtec was selected in November to take over city waste management and retain full-time city employees, part of a strategy to cut costs by contracting for services. The city expects a one-time $5 million payment and annual savings of $2.8 million.

A federal appeals court last week upheld Judge Jury’s ruling that the city charter does not prevent contracting for fire services. Annexation of San Bernardino by the county fire district is expected to yield a $143 parcel tax and lower pension costs, netting $11 million a year.

At a hearing last week, Jury moved on from pensions and asked for an explanation of why the San Bernardino plan only gives some creditors 1 percent of what they are owed and does not raise taxes to pay more debt, the San Bernardino Sun reported.

Voters approved a 1-cent sales tax increase in Vallejo and a ¾-cent sales tax increase in Stockton. The San Bernardino plan would pay only about 1 percent of the amount owed on a $50 million pension obligation bond.

Among the major remaining opponents of the plan are the holder of the unsecured pension bond, EEPK, which is a subsidiary of Commerzbank of Germany, and the insurer of the bond, Ambac.

A request from the San Bernardino bondholders to be treated the same as pensions was rejected by Jury last May, and the ruling is being appealed. Mediation on Nov. 18 and 19 failed to produce a settlement.

Early this month in the Stockton bankruptcy, a federal appeals court rejected an appeal of a 1 percent payment on $30 million in unsecured bonds held by Franklin Templeton, which argued creditors were treated unfairly because pensions are untouched.

Jury predicted last week that the confirmation trial on the San Bernardino plan to exit bankruptcy will begin this spring or summer, the Sun reported. The fourth anniversary of the bankruptcy is Aug. 1.

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 28 Dec 15

This piece was originally published by CalPensions.com

San Bernardino’s bankruptcy plan favors CalPERS

As reported by the L.A. Times:

San Bernardino’s plan to exit bankruptcy has at least one winner, plenty of losers and could have repercussions for other California cities.

The city will pay every penny of the almost $50 million it owes to the California Public Employee Retirement System, known as CalPERS, if a federal judge approves the plan.

But it will only pay one penny for every dollar it owes to some bondholders who helped the city pay its CalPERS bill over the years.

Retirees will lose healthcare benefits that they were promised. …

Click here to read the full article

Stockton and Detroit Exit Bankruptcy Leaving Pension Systems As-Is

The landscape for public employee pensions shifted in 2014 as federal judges gave credence to the idea that pension benefits may be cut in bankruptcy. This challenges the long held idea that pension benefits are impervious to cuts and most observers are wondering just how significant this shift will be going forward.

This fall, city leaders watched as federal judges approved debt-cutting bankruptcy plans in Stockton and Detroit, ending two of the largest municipal bankruptcy cases in U.S. history. Many speculated both cities could do more to ease their fiscal problems by making significant cuts and structural changes to public pensions. However, both judges demurred and moved forward with plans that eased a portion of the cities’ financial obligations, but largely protected pensions. The failure to significantly address public pension debt and make structural changes to the pension systems in both Stockton and Detroit does not bode well for the economic future of either city post-bankruptcy. It also presents an interesting conundrum for other cities in dire fiscal distress that bear significant pension costs and unfunded liabilities. Are more cities to follow the path to pension cuts in bankruptcy?

In Detroit, the nation’s largest municipal bankruptcy case ended on November 7, fifteen months after it began. The restructuring plan approved by Judge Steven Rhodes slashed $7 billion in debts with bondholders receiving between 14 and 74 cents on the dollar back from the city. Public pensioners did not see cuts as deep, thanks in part to the likes of Van Gogh and Renoir. Detroit’s so-called “grand bargain” transferred ownership of part of the Detroit Institute of Arts collection from the city to the nonprofit running the museum for $816 million. The money, to be paid out over 20 years, comes from state taxpayers and privately-donated funds raised to offset deeper pension cuts. Pensioners in Detroit’s general retirement system are taking a 4.5 percent cut to their monthly pension check, will no longer receive cost-of-living adjustments, and will see a reduction in medical benefits. Some members who received excess annuity payments from the city will also be required to pay them back. Police and firefighter pensioners will only see a reduction in cost-of-living adjustments from 2.25 percent to 1 percent annually.

The pension cuts, which have been called “modest” by both the Wall Street Journal and NPR are exactly that. Detroit’s unfunded pension benefits are still a risk to the city’s fiscal health. And the system still relies on unrealistic rates of return when calculating required pension system contributions—the General Retirement System assumes a 7.9 percent annual return and the Police and Fire Retirement System assumes 8.0 percent, even though the city has only been earning an average of 5.89 percent for the general system and 5.5 percent for the police and fire system over the last 10 years, from 2004 to 2013.

In Stockton, even less was done to address the city’s pension problems despite a golden opportunity to make significant reforms. On October 1, Judge Christopher Klein ruled that the city could reduce its payments to CalPERS and exit its contract with the pension administrator if the city wanted. It was in his purview to cut the pensions if he saw that as the city’s best course of action. But the city chose not to modify its pension benefits or leave CalPERS. On October 30, the fourth largest U.S. municipal bankruptcy case was settled when Judge Klein approved Stockton’s bankruptcy plan, leaving existing pension benefits intact. The city agreed to pay most bond creditors between 50 to 100 cents on the dollar. Investment firm and Stockton creditor Franklin Templeton received only $4.3 million back from a $36 million loan (or 12 cents on the dollar).

Judge Klein noted the reason he left public pensions untouched was because public workers had already suffered other cutbacks, including having their salaries and healthcare benefits reduced, and because redoing current employee pensions would not be a simple task. Franklin Templeton disagrees and is appealing the judge-approved plan at the Ninth Circuit Court for further remedies.

The so-called “California Rule,” which means pension benefits cannot be reduced for current employees, was once thought to be ironclad, but Judge Klein’s ruling opens up the possibility for a future bankrupt California city to challenge it by choosing to cut pensions or leave CalPERS entirely if the city ends up in bankruptcy. Some thought that San Bernardino, another city battling with CalPERS, may take this route. Yet after Klein’s October 31 ruling on Stockton, San Bernardino decided to pay full fare despite the fact that they had previously tried to reduce their payments to CalPERS. Like San Bernardino, Stockton missed an opportunity to shrink its $29 million annual pension costs that have led to both reduced services for the citizens of Stockton and a new sales tax.

Granted, though there are not a lot of cities currently positioned to challenge the California Rule, Moody’s Investors Services points out that Judge Klein’s October 1 ruling allowing cities to cut pensions may give cities more negotiating power with public sector unions. In reality, reducing pension benefits is likely only an option for larger cities where pension obligations and general fund costs make it reasonable to wager tens of millions of dollars on the litigious process so that they can reduce their pension liabilities in the hundreds of millions or billions of dollars. Los Angeles and Chicago, anyone?

Both Stockton and Detroit are still saddled with billions in unfunded pension debt even after exiting bankruptcy. The bankruptcy plans that both cities presented and got approved did nothing to even chip away at existing pension debt. It is unlikely that either city will be able to contain the pension debt that devours their budgets unless structural changes are made to the current defined benefit pension systems they have in place. Other formerly bankrupt cities, like Vallejo, California, have struggled post-bankruptcy because of pension debt and the same type of budgetary problems affecting Stockton and Detroit.

This is only the first couple of rounds of a long bout, as we learned from the lengthy reform processes in San Diego and San Jose. Pension systems like CalPERS have deep pockets and one can sympathize with the city manager or attorney who decides not to go for the option of challenging the increasing costs of pensioners even though legal precedence is tilting in their favor. No doubt, without substantive reform that provides for an affordable and secure retirement system for both the retirees and taxpayers, that pays down the debts sooner rather than later and requires that these jurisdictions pay their full pension costs, Detroit and Stockton will likely be back before a judge begging for more protection. Just ask Vallejo.

Lance Christensen is Director of the Pension Reform Project at the Reason Foundation, and Victor Nava is a Policy Analyst at the Reason Foundation.