City of Stockton to Consider America’s First Basic Income Grant

StocktonThe city of Stockton, California, is planning to offer a basic income grant of $500 per month to poor residents, making it the first U.S. city to provide a guaranteed income.

Mayor Michael Tubbs announced the program on Wednesday, according to Capital Public Radio. “This is not a handout, it’s a hand up,” he reportedly said. The program is to be privately funded by the Economic Security Project, which Capital Public Radio describes as “a network of researchers, elected leaders, and organizers” and which is run by Facebook co-founder and Barack Obama campaign veteran Chris Hughes.

Stockton declared bankruptcy in 2012, a result of high pension costs, economic stagnation, and “a 15-year spending binge.” Though the city and its finances have recovered somewhat, and the city emerged from bankruptcy in 2015, poverty remains a problem.

The idea of a guaranteed basic income has been gaining traction lately, largely thanks to the advocacy of Facebook founder and CEO Mark Zuckerberg, who has suggested it may become necessary in the future as technological innovation pushes more people out of traditional jobs.

“We should explore ideas like universal basic income to make sure everyone has a cushion to try new ideas,” Zuckerberg said in May at the commencement ceremony at Harvard University.

In a Facebook post in July, Zuckerberg touted Alaska’s Permanent Fund — which pays dividends to residents every year from a portion of oil and gas revenues — as an example of a successful basic income grant. However, few states have Alaska’s vast resources and low population.

Others in Silicon Valley have also advocated for the idea. The Stockton pilot project will reportedly involve 25 to 75 families.

Joel B. Pollak is Senior Editor-at-Large at Breitbart News. He was named one of the “most influential” people in news media in 2016. He is the co-author of How Trump Won: The Inside Story of a Revolution, is available from Regnery. Follow him on Twitter at @joelpollak.

This article was originally published by Breitbart.com/California

Mayor of Stockton arrested for playing strip poker with teens and secretly recording it

As reported by the Washington Post:

Silva mugAnthony Silva, the mayor of Stockton, Calif., has a history of bizarre, outlandish and questionable behavior. His own website states that he is “a little ‘rough around the edges.’”

That may be an understatement.

During a mayoral candidate debate hosted by Stockton’s NAACP and Black Women Organized for Political Action in April, Silva — who is white — said he was the city’s first black mayor.

The next day, he clarified his statement to CBS, “I think I said, I’m not African American, but I’m pretty darn close. Quite frankly, I could be determined to be the first African American mayor of Stockton.”

In 2014, he was handcuffed after a fight broke out in a limousine. The fight caused $7,000 to $10,000 worth of damage to the car. Curtis Mitchell, who was arrested for the fight, said Silva inappropriately touched his fiancée. Silva denied the claim. The mayor was never arrested, but the limousine’s driver filed a civil lawsuit against him and the other passengers in May. …

Click here to read the full story

Property Taxes to Increase by 13 Percent in Coming Year

property taxIn Chicago, escalating property taxes are headline news. With the average property tax bill due to go up by 13 percent – and more increases in subsequent years virtually guaranteed – home ownership in the Windy City is in deep peril. No one seems happy except the moving companies.

This drastic tax increase is the result of bad decisions by corrupt officials who have caved to city employee pension demands that are unsustainable without massive borrowing. And that borrowing will be paid for by massive property tax hikes. But if homeowners are considering fleeing exorbitant taxation, they may have to travel a good distance. Illinois residents, even without the Chicago pension tax, are already paying the highest effective property tax rate in the nation at 2.67 percent, according to a recent study by CoreLogic, an Irvine, California-based provider of data to the financial and real estate industries.

Nationally, the study shows the median property tax rate is 1.31 percent of value.

In addition to Illinois, states with median property tax rates of greater than 2 percent include New York, New Hampshire, New Jersey, Texas (which some may find surprising considering its reputation as a low tax state), Connecticut and Pennsylvania. On the low end is Hawaii at 0.31 percent.

California, at 1.12 percent, ranks 30th compared to other states. Tax seeking politicians and their special interest allies will likely consider this a failure. After all, thanks to them, California has the highest state sales tax, highest marginal income tax rates and, due to carbon charges, the highest gas levies in the nation. “Why shouldn’t we be number one in every tax category?” they are, no doubt, asking themselves.

California property tax rates are reasonable for one reason and one reason only – Proposition 13. Arguably the most famous of all initiatives in the history of the United States, Prop. 13 was the brainchild of the late Howard Jarvis. He led the effort to put the tax limiting measure on the ballot where it was approved by nearly two-thirds of California voters in 1978. By limiting annual property tax hikes to two percent per year, it made tax bills moderate and predictable.

Still, California property taxes are not low. Because of high property values, the median priced home now costs nearly $519,000 according to the California Association of Realtors. Thus, while our effective tax rate ranks 30th of the 50 states, when measuring property tax revenues per capita, we rank 14th. This belies government complaints that California is starved for property tax revenues.

Proposition 13 protections should not be taken for granted. Consider the cities of Stockton, Vallejo and San Bernardino which were driven into bankruptcy by officials who, like Chicago’s aldermen and mayor, agreed to inflated and unsustainable pension benefits for government workers. The difference is that Proposition 13’s tax limiting provisions prevent California cities and counties from arbitrarily increasing property taxes. At least for now.

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

Stockton’s Pension Struggles Offer Lessons for California

StocktonIt was an official document, circulated by former Republican Assemblyman and Board of Equalization member Dean Andal, who is well respected for his understanding of fiscal matters. The city pooh-poohed the suggestion, and provided its own economic analysis, although it refused to share the detailed data with the media or the public.

The bad news was easy to believe. Stockton’s bankruptcy exit plan didn’t address the fiscal elephant in City Hall (unfunded pension liabilities). The city was following the basic route taken by the Bay Area city of Vallejo, which also went bankrupt and soon again faced deep fiscal problems.

The crux of Stockton’s plan was a voter-approved tax and spending plan. Measure A raised the city’s sales tax by three-quarters of a cent. Measure B was an advisory vote for how the money would be spent. The tax-hike campaign promised significant new spending on popular programs, especially law enforcement in that crime-plagued city. Voters approved the measures.

Now, after collecting the tax for 15 months, the data seems to confirm what Andal had been saying. “After only one full budget year, the city has already broken three fundamental promises and is destined to return to insolvency within four years,” wrote Andal in a letter this month to supporters and opponents of the 2013 ballot measures.

First, the city promised to hire 120 net new police officers over three years, with 40 new officers hired by last July. The city hired only 13 new officers so far. Second, the city promised the new sales-tax measure would raise $29.5 million by July, but fell $1.4 million short. Third, the “plan of adjustment” expected its pension payments to the California Public Employees’ Retirement System to be nearly $23 million – but the actual costs were $23.7 million higher.

The Stockton situation is of statewide importance because it’s clear the state’s unfunded pension liability crisis has not gone away even in relatively good economic times. “All these budget problems show up at the service level,” Andal told me. He says Stockton faces “service insolvency,”  i.e., a budget so troubled the city cannot provide adequate levels of public services.

Stockton spent $38 million in legal fees in a nationally watched bankruptcy proceeding. Judge Christopher Klein ruled that cities could cut pension benefits in bankruptcy. Stockton officials chose not to do so, relying instead on other cuts and sales-tax increase. Now that their numbers might not be adding up, it puts the city in a difficult position, Andal argues, given it already has the highest sales tax allowed by law, the highest utility tax in the Central Valley and some of the highest developer fees.

Other cities will likewise find limited ability to raise new revenues as CalPERS continues its plan to ramp up its bill for cities that participate in its pension plan. Yet Sacramento officials act as if the pension problem is gone. There’s hardly an issue legislators didn’t try to address in the recently concluded legislative session, yet nothing of substance to deal with growing pension debts. The good-government group California Common Sense confirms that the state’s unfunded pension liabilities continue to show a pattern of steady increases.

Pension reformers led by former San Jose Mayor Chuck Reed and former San Diego city councilman Carl DeMaio have proposed a statewide measure that would subject most local pension increases to voter approval. They say the title and summary Attorney General Kamala Harris offered for that measure includes the same union-backed poison pill (claiming the initiative undermines constitutional benefit protections) she used for previous pension reform measures. They plan take the matter to court.

So nothing much has changed at the statewide level, with the state political establishment squelching reform. Sadly, it might take another economic downturn to get Sacramento officials to check out the problems in a city just 50 miles from the Capitol.

Originally published by Reason.com

Steven Greenhut is the California columnist for U-T San Diego.

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.

Stockton Bankruptcy Ruling Backs Away from Pension Reform

Jack Dean likes to tell the story of Prichard, Alabama, a city that declared bankruptcy not once, but twice.

“They were warned that the pension fund was running dry, and in 2009, it ran dry,” says Dean. “So they stopped mailing the checks.”

Dean, the editor and founder of PensionTsunami.com, tells the cautionary tale of Prichard in response to Thursday’s federal ruling that gave the California city of Stockton the green light to exit bankruptcy by paying bond investors chump change while protecting public pensions.

“Once again, Calpers has managed to intimidate a city government into not dealing with the pension issue,” says Dean. “So we’ll continue to careen down the pension crisis path, because they’re not paying attention to the elephant in the corner.”

While Stockton pensioners breathed a sigh of relief, an executive at Calpers, the nation’s largest pension fund, called U.S. Bankruptcy Judge Christopher Klein’s ruling “smart.”

“The city has made a smart decision to protect pensions and find a reasonable path forward to a more fiscally sustainable future,” Calpers Chief Executive Officer Anne Stausboll said in a statement. “We will continue to champion the integrity and soundness of public pensions.”

Earlier this month, Judge Klein issued the explosive decision that pensions can be reduced in bankruptcy, but on Thursday, he accepted the city council’s plan for Stockton, suggesting the workers had suffered enough.

“What it means is when you go into bankruptcy, pensions are not protected,” says San Jose Mayor Chuck Reed, who’s leading California’s pension reform movement. “But in this case, Judge Klein looked at the whole package, and decided that employees gave up their health care for pennies on the dollar… So you don’t necessarily have to cut pensions, you don’t necessarily have to cut health care, you don’t necessarily have to cut salary, but you have to do something to deal with the problem. Employees have to share the pain.

“The takeaway for California is it would be a whole lot better if we could deal with these problems outside of bankruptcy and before bankruptcy.”

Reed says local governments should be empowered to negotiate changes in future benefits as a means of controlling the costs in order to avoid the pain of bankruptcy.

“It’s certainly a knockdown, drag out fight in San Jose,” says Reed, who is calling for the U.S. Justice Department to investigate San Jose’s police union for corruption. “The good news is, we’re saving 25 million dollars a year due to our pension reforms and we’re putting that back into city services.”

In court on Thursday, Judge Klein suggested that Stockton’s plan was the best it could do and that bankruptcy was a dauntingly expensive proposition.

But attorney Robert Flanders, the municipal fix-it guy in Rhode Island, says when push comes to shove, don’t be afraid of the “B” word.

Flanders, a partner in the law firm Hinckley-Allen, was the state-appointed receiver in Central Falls, Rhode Island, which went through a bankruptcy restructuring in 2011 and came out the other side.

“It was plain that we were running out of cash to pay people,” says Flanders. “That’s when I had to go in front of them and say, ‘I’m sad to say this, but there’s a risk that you’re not going to get paid at all and we’re going to default. A haircut still looks a lot better than a beheading.’ It really was the true situation.”

Thirteen months later, the city was back in business and ultimately retirees ended up with a 25 percent haircut, down from a high of 55 percent.

“We took the opportunity of the bankruptcy to not only restructure the pension system, but get rid of the gamesmanship and make it much more favorable to the taxpayers,” says Flanders. “It can be done, and it can be done quickly. The beauty of it from a legal standpoint is all the arguments about breach of contract amount to a hill of beans in a bankruptcy proceeding because the only issue is what can a city afford.”

He says Judge Klein is giving Stockton the benefit of the doubt. But Stephanie Gomes, the former vice mayor of Vallejo, says Stockton missed the opportunity to learn from Vallejo’s mistake. Vallejo was the first California city to topple.

“If I were on the Stockton city council, I would’ve pushed for some sort of pension reform,” says Gomes, who was on the Vallejo city council before, during and after the city declared bankruptcy. “We didn’t have a majority willing to do that, and because of that, we are still saddled with crushing pension debt in Vallejo, and we’re still struggling with our exit plan.”

In effect, she says, Vallejo failed bankruptcy.

“I call Calpers ‘Hotel California,’” says Gomes. “Once you’re in, you can never leave. Until there’s statewide reform, there’s not much cities can do.”

For John Moore, a candidate for mayor in the seaside town of Pacific Grove, California, Thursday’s ruling was a bummer.

“Judge Klein led us on for about a year,” says Moore, a retired attorney whose run for mayor is an attempt to tackle Pacific Grove’s pension debt. “We thought something really big was going to happen, and now we have a plan that has no chance of working.”

Dean says nothing changes the fact that Stockton’s pension fund is millions in the hole.

“When the checks stop coming in the mail, maybe we’ll get reform.”

This piece was originally published on Fox and Hounds Daily

Have Stockton officials learned their fiscal lesson?

The Bureau of Labor Statistics, which tracks monthly unemployment in 372 metropolitan areas, reported that Stockton, California had the nation’s eighth-highest jobless rate at the end of August. More than 10 percent of those looking for work in the struggling Central Valley city couldn’t find it. This is nothing new. Stockton has been coping with unemployment rates 50 percent to 75 percent above the national average for more than a decade. Based on that long history of joblessness, you’d think that qualified local residents would be ready to snap up government jobs with starting salaries of $60,000, plus health benefits, a pension, and yearly pay increases. Apparently not: according to the city’s elected officials, if Stockton is forced to reduce its generous and costly retirement plan as part of its exit from bankruptcy, the city will see a “mass exodus” of workers and won’t be able to fill crucial positions in its police and fire departments.

Bankruptcy judge Christopher Klein ruled last week that the unusual legal protections enjoyed by California pensions, which make it virtually impossible to cut the costs of a pension plan in the Golden State, did not apply in bankruptcy court. Stockton city officials and lawyers were livid. They had planned a reorganization sharply cutting what some creditors receive while leaving the city’s gigantic annual pension bill untouched. One city creditor, Franklin Templeton Investments, which would receive as little as one penny on the dollar for its unsecured claims, has objected, arguing that it’s not fair that Stockton could ignore its huge retirement debt. Judge Klein essentially agreed, saying that there’s no reason the city couldn’t hack away at it, or even dump its expensive plan with the California Public Employees’ Retirement System and seek a cheaper alternative. “There are lots of permutations and combinations out there,” said Klein, explaining the various ways Stockton might save money by replacing its expensive pensions with something more affordable.

Stockton officials’ claims that they would face a personnel crisis if they cut pensions strain credulity. Salaries and benefits in California’s public sector are so generous that, even after bankruptcy, a government job should appeal to many Stockton residents. Based on a deal negotiated between the city and its police union after Stockton entered bankruptcy, the starting salary for a police officer is $4,970.39 per month, or $59,644 annually. That rises to $72,888 after five years. Firefighters start at $49,000 annually, a salary that rises to $60,000 in five years. The city’s median annual household income is less than $36,000. Stockton will also spendabout $14,000 a year toward a family health-insurance plan for a new officer or firefighter. New officers enter a pension plan under which they can retire at 57, with 2.7 percent of final salary for every year served. So an officer with 30 years of service and a final salary of $75,000 would qualify for a pension of nearly $61,000.

Public service is apparently so tough in Stockton, however, that the city claims it must compete aggressively for a limited pool of new workers. Stockton’s former city manager justified not asking for significant changes to pensions because “we cannot just pluck people from the unemployment lines—the requirements to be a police officer are demanding and 99 percent of applicants do not qualify or, if hired, wash out.” Some elite military units have lower washout rates.

Government-worker unions exploit this kind of thinking to demand higher wages and benefits, especially when neighboring municipalities boost their compensation. That creates an ever-upward spiral of wages as school districts, towns, and cities adopt the new wage levels, regardless of whether they can afford them. Stockton officials admit that their current woes are a product of this mindset. In 2012, the former city manager pointed out that for years, Stockton officials added benefits in line with those offered by other cities. “Nobody gave a thought to how it was eventually going to be paid for,” he said.

Stockton risks coming out of bankruptcy with a heavy compensation burden. Officials argue that city workers have sacrificed enough, largely because the city eliminated its program of providing free health-care coverage for all retirees. But that extremely expensive perk is rare in the private sector and disappearing in government. Meanwhile, however, pension contributions for public-safety workers now amount to 41 percent of payroll. That would put the total cost of salary, health benefits, and pensions at about $120,000 annually for a fifth-year officer. The good news, if you can call it that, is that the city projects that after several more pension increases in coming years, Stockton’s soaring retirement costs will “level off.” The bad news is that pension contributions already amount to $42 million annually in a city with a general-fund budget of just $185 million.

Stockton is heading down a path previously traveled by Vallejo, the Bay-area city that emerged from a three-year bankruptcy in late 2011 without cutting its pension debt. Vallejo tried to compensate for its still-high retirement costs with cuts elsewhere but is now struggling financially thanks to its soaring pension costs, including annual pension contributions for police officers that average about $50,000 per cop.

The long saga of Stockton’s decline dramatizes the inefficiency and illogic of union-dominated, monopolistic, government-labor markets. California laws and court rulings provided Stockton workers with extraordinary protections for some benefits, including one of the nation’s most generous pension plans. When Stockton couldn’t cut its labor costs fast enough, it engaged in destructive rounds of layoffs because, ironically, the one thing you can do when all else fails is fire people. City residents and laid-off city workers were the losers.

Now Stockton has a chance to reach more solid financial footing thanks to Judge Klein’s ruling and a painful two-year sojourn through bankruptcy. But it’s not clear that city officials have learned their fiscal lessons.

This article was originally published by City Journal.

Federal Judged Rules CalPERS Pensions Can Be Cut

A federal judge ruled yesterday that CalPERS pensions can be cut in bankruptcy like other debt. He rejected the argument that the giant system is an “arm of the state” with pensions protected by federal law and two state laws on contracts and liens.

U.S. Bankruptcy Judge Christopher Klein, who has called the issue of whether CalPERS pensions can be cut in bankruptcy a “festering sore,” delayed until Oct. 30 a ruling on whether Stockton can exit bankruptcy without cutting pensions.

Stockton does not want to cut pensions, arguing they are needed to be a competitive employer, particularly for police. The city reached agreements with three bond insurers owed $265 million, all labor unions, retirees and other major creditors.

But Stockton could not negotiate an agreement with a lone holdout, two Franklin bond funds owed $36 million, triggering a trial in May on the Stockton “plan of adjustment” to cut debt and emerge from the bankruptcy filed two years ago.

Franklin argues that an exit plan that provides full payment of the city’s “massive” pension liability, while paying Franklin a penny on the dollar, cannot be confirmed under the federal bankruptcy code requiring fair treatment of creditors.

Klein issued his CalPERS decision after receiving extensive written briefings from both sides he requested at the May trial. His lengthy oral ruling, covering the disputed legal points in detail, may be followed by a written decision.

“We have a plan that proposes not to adjust pensions,” Klein said. “I have concluded that pensions could be adjusted, at least the CalPERS contract could be adjusted, and by inference the pensions could be adjusted.”

 

A federal judge ruled in the Detroit bankruptcy last fall that pensions can be cut. CalPERS joined in the appeal, arguing that Detroit has a city-run plan and that CalPERS is an arm of the state whose operations are protected under federal bankruptcy law.

“We disagree with the judge’s opinion on the issue of pension impairment,” CalPERS said in a news release. “This ruling is not legally binding on any of the parties in the Stockton case or as precedent in any other bankruptcy proceeding and is unnecessary to the decision on confirmation of the City of Stockton’s plan of adjustment.

“CalPERS will reserve any further comment until such time as the court renders its final written decision. What’s important to keep in mind is what the City of Stockton stated in court today: that they can’t function as a city if their pensions are impaired.”

Matthew Jacobs, CalPERS general counsel, said in a separate news release: “The real precedent of today’s proceedings is that even if municipalities are allowed to impair pensions in the rare situation of bankruptcy, cities like Stockton can make the smart decision to protect the pension promises for their public employees.

“The city has made a choice to protect pensions for its public employees and find a reasonable path forward to a more fiscally sustainable future. This is the right decision. While we disagree with today’s ruling on pensions, we are hopeful that Judge Klein will approve Stockton’s plan. Providing great services to a city requires great employees and Stockton said today in court that it can’t function as a city if pensions are impaired.”

CalPERS has taken several steps, some going back decades, to avoid a ruling like the one Judge Klein made yesterday.

Vallejo officials said they considered cutting pensions in bankruptcy, but chose not to try after CalPERS threatened a lengthy and costly legal battle. Vallejo cut deals with all creditors, avoiding a rare trial as on Stockton’s plan to “cram down” debt.

The Vallejo bankruptcy prompted public employee unions to back legislation requiring cities to get permission from a state panel to file bankruptcy. Some union officials said the threat of “pulling a Vallejo” could affect labor contract bargaining.

The bill, AB 506 in 2011, was altered to require an attempt in neutral mediation to reach an agreement with creditors before filing bankruptcy. Stockton failed to get an agreement during a 90-day mediation before filing for bankruptcy on June 26, 2012.

A month later San Bernardino made an emergency filing for bankruptcy without first trying mediation. Then San Bernardino, saying it was in danger of not making payroll, took an unprecedented step: skipping payments to CalPERS for a year.

The failure to make payments gave the California Public Employees Retirement System grounds to terminate its contract with the city, probably triggering a deep cut in pensions for San Bernardino current workers and retirees.

Last June San Bernardino announced an undisclosed agreement with CalPERS, reached in closed-door mediation, to pay the $13.5 million in skipped payments, plus several million more in penalties and interest.

San Bernardino is still struggling to reach agreements with labor unions, receiving court approval to modify a firefighter contract. City officials have said they do not expect to have a debt-cutting plan of adjustment until early next year or later.

In the Stockton bankruptcy, Judge Klein said during the trial in May that one of his options was ruling on whether CalPERS pensions could be cut without necessarily finding that Stockton pensions should be cut.

Part of his analysis yesterday that CalPERS pensions are not state “governmental or political powers” protected under federal bankruptcy law is that while state workers are in CalPERS by statute, cities choose to join CalPERS.

Klein said California cities have the option of forming their own pension systems, joining a county pension system, hiring a private pension provider or withdrawing from CalPERS, if they can afford to do so.

He concluded that benefits not prescribed by state law are not “governmental or political” powers protected by the federal bankruptcy law, but instead are unprotected “business powers.”

Klein said a CalPERS-sponsored state law preventing cities from rejecting their CalPERS contracts in bankruptcy is “flat-out invalid” under the constitutional “supremacy clause” giving federal law priority over state law.

The judge said another CalPERS-sponsored state law that gives CalPERS a lien on all city assets, except wages, when they declare insolvency is an invalid attempt by the state Legislature to “edit” the federal bankruptcy law.

Stockton argues that its employees and retirees have a fair share of the bankruptcy burden with pay cuts, workforce reductions and the elimination of retiree health care, a $545 million long-term debt replaced with a $5 million lump sum.

Klein’s ruling on Stockton may hinge on the city’s decision to place Franklin in the same class of debtors as retirees, who voted to accept the big cut in health care with the promise that their pensions would not be cut.

The low payment to Franklin is similar to the retiree health care cut. Franklin argues that it was “punished” for rejecting a city offer in closed-door mediation and unfairly placed in the debtor class to be “swamped” by the retiree approval of their health care cut.

The city argues that Franklin is properly in the class because most of its debt is unsecured. After the judge ruled that Franklin’s collateral (two golf courses and a park) were valued at $4 million, Stockton amended its plan to pay that amount.

But Franklin wants payment for the remaining $32 million of unsecured debt.

This article was originally published on Calpensions.com

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune.