Were Pensions a Driver in San Bernardino Bankruptcy?

A sharp spike in pension costs is not the reason an alarmed San Bernardino city council voted last week to authorize filing for bankruptcy, fearing the city may not have enough money to make a full payment to employees next month.

The city’s pension payments climbed steadily from a little over $5 million in 2000 to about $23 million in 2008. But the payments have remained at roughly $23 million since then, and increases forecast in the next few years are gradual.

A 45-page budget analysis posted on the city website last week said “retirement costs” were 9 percent of the general fund in fiscal 2006-7, grew to 13 percent last year and are expected to be 15 percent in fiscal 2015-16.

Retirement costs in Stockton, which filed for bankruptcy on June 28, are about 17.5 percent of the general fund. Retirement costs in San Jose and San Diego, where voters approved major pension cuts last month, are 20 percent of the general fund.

“The reasons for our dilemma are multiple and long enduring,” San Bernardino Mayor Pat Morris, a Stanford law graduate and former judge, told reporters a day after the vote last week.

“They began long before the meltdown of our economy,” Morris said. “We have been living on the financial edge for a long, long time. But we were unmasked by the meltdown in 2007 when we lost $16 million in sales tax in one year, when we lost 60 percent of our land value and 9,000 homes went into foreclosure.”

The local economy took long-term hits from the closure of the Kaiser steel plant and Norton Air Force Base, news stories said, and the city is now a bedroom community with 15 percent unemployment and 43 percent on some form of public assistance.

To fast-food aficionados, the old Route 66 city is the birthplace of McDonald’s, before the purchase by Ray Kroc, and of the Taco Bell prototype, first called Taco Tia by Glen Bell, whose employees were inspired to found Del Taco and Der Wienerschnitzel.

An editorial in the San Bernardino Sun over the weekend called for an end to a political feud between Morris and city attorney Jim Penman, a two-time loser to Morris in races for mayor.

“More than political rivalry, it’s come to drive the agenda, a maelstrom that drags down everything around it, polarizing the city’s leadership and paralyzing the process,” wrote Frank Pine, the Sun executive editor.

The San Bernardino County Sentinel speculated in March that the election of councilman John Valdivia shifted the balance of power on the council from Morris to Penman.

Morris unsuccessfully tried to change the city attorney from an elected to an appointed position, said the Sentinel, and Penman had his office investigate Morris and others for alleged violations of the political reform act.

The Sentinel said one of the first council actions after the pivotal March election approved a previously blocked $939,000 supplemental appropriation to the city attorney’s office.

Penman said last week that 13 of the last 16 city budgets may have been falsified, but he declined to reveal what he reported to authorities. Sheriff Rod Hoops told reporters he thinks a criminal investigation of the city is unrelated to Penman’s allegations.

The 4-to-2 council vote last week (the mayor only votes to break a tie) authorized Penman to seek bankruptcy. Interim city manager Andrea Miller said the city may need a month to prepare a bankruptcy filing.

Penman told the city council that Miller and finance director Jason Simpson, both hired in April, and an outside expert (an apparent reference to Michael Busch of Urban Futures) have not been involved in the political battles.

“They have all told us the same thing,” said Penman. “The attorney’s office has been informed that the cash flow situation is so poor that we probably will not be able to make the Aug. 15 payroll to our employees.”

To get bankruptcy protection from creditors before then, the city apparently would use the “fiscal emergency” provision in a new state law, AB 506, regulating municipal bankruptcy filing.

A city council meeting is scheduled today. Stockton used the full period prescribed by the new law for mediation with creditors, 90 days, but was unable to get agreements on enough savings.

The 45-page budget analysis prepared by the new financial team may raise questions about whether the city budget gap is being exaggerated to bolster the case for an emergency bankruptcy filing.

A chart on page 14 shows general fund spending last fiscal year was about $140 million. In the new fiscal year, finance director Simpson said the general fund is expected to spend $166 million.

Much of the increase is said to be due to the expiration of cost-cutting contracts with all unions except firefighters that saved $10 million and repaying money taken from internal funds for workers’ compensation, general liability and retiree health.

Revenue is expected to be about $120.4 million, probably increasing with a $1.2 million federal firefighter grant in September. So the projected budget is roughly $45 million.

But why the internal funds must be repaid this year is not clear, nor is the amount of effort made to get unions to continue the $10 million in concessions or give the city other savings.

The report said the city has negotiated lower pensions for new hires: 2 percent of final pay for each year served at age 55 for non-safety workers and 3 percent at 55 for police and firefighters.

That’s still higher than lower new-hire pensions negotiated by many employers. For example, most current state workers get 2 at 55 and new state workers will get 2 at 60.

A famous trendsetting bill sponsored by CalPERS, SB 400 in 1999, moved the Highway Patrol from 2 at 50 to 3 at 50. Some employers are getting unions to agree to roll back new hires to the old formula, 2 at 50.

The California Public Employees Retirement System formulas used by the city split pension costs between the employer and the employee. Like many other cities, said the report, San Bernardino has been paying all of the employee share.

For police and firefighters the city share is 30 percent of pay, and the employee share is 9 percent of pay. For non-safety workers, the employer share is 17 percent, the employee share 7 or 8 percent depending on the formula.

In union agreements in some cities, current workers are beginning to pay some of their share of the CalPERS payment, allowing the cities to reduce their pension payment by a similar amount.

The new San Bernardino labor agreements only have new hires paying the employee share. The report suggests that the city could cut costs by urging current workers to pay the employee share or possibly even a 50-50 split with the city.

Could bankruptcy be avoided by taking a harder line with unions, delaying repayment of the internal funds, raising revenue as suggested in the report or bridging the usual “dry” period in tax revenue with a loan or reduced paychecks to be backfilled later?

A bankruptcy filing may get some challenges. But the city, battered by a changing economy and political infighting, apparently has allowed itself to slide into a deep financial hole.

Simpson told the council that salary and benefits are expected to cost $126 million this year, exceeding the projected $120.4 million in revenue available to cover not only employee costs but other general fund city programs and services as well.

But again there is no supporting detail. Attachments to the 45-page budget analysis that might contain crucial data were not posted on the city website for review by skeptical citizens.

Some glitches raise doubt about whether the analysis was prepared with care. Page 36 begins in mid-sentence, “realized from the issuance of POBS,” with no apparent connection to the final sentences at the bottom of page 35.

A passage on page 35, repeated from page 23, is an error: “In San Bernardino, city-paid pension costs have grown from $1 million in FY 2006-07 to $2.2 million in the upcoming FY 2012-13 budget. Costs are projected to grow to 2 % in FY 2013-14.”

A reader might guess that the numbers are for retiree health care, which are not listed in the report. A chart on page 36 shows city pension costs climbing to about $23 million a year in 2008 and then leveling off.

In one of several moves to give the public a better view of its operations, CalPERS (in addition to webcasting board meetings) has begun posting the annual pension valuations of more than 1,500 employers with 2,200 plans.

The annual San Bernardino safety plan employer contribution for police and firefighters was 28.3 percent of pay last year, increased to 30.1 percent in the new fiscal year and is expected to be 31.9 percent in fiscal 2016-17.

But that assumes CalPERS hits its old investment earnings target of 7.75 percent, lowered in March to 7.5 percent. If investments lose 3.64 percent a year, the employer contribution in fiscal 2016-7 is expected to be 46.9 percent.

In California public pensions, the employer, and thus the taxpayer, is responsible for covering investment losses. The employee pension contribution is regarded by some as a “vested right,” protected by contract law, that can only be increased if employees get a benefit of equal value.

(Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. Originally posted on CalPensions.)