San Bernardino Pension Showdown?
The city of San Bernardino has stopped making payments to CalPERS, the state's public employee pension fund, since filing for Chapter 9 bankruptcy protection Aug. 1.But there is much more to this story than just slashing the budget of the fire department. Tim Reid of Reuters reports, Calpers threatens San Bernardino over pension debt:
CalPERS spokeswoman Amy Norris said the city had failed to make $5.3 million in payments, and $1.2 million was considered delinquent.
It is not common for cities to become delinquent on their payments to the pension system, Norris said. The cities of Stockton and Mammoth Lakes, which also filed for bankruptcy this year, have continued to make their payments.
In a statement, CalPERS said it had been working with the city in an attempt to resolve the issue.
"If CalPERS and the City cannot resolve the missed payments, CalPERS will assert its rights and remedies available under applicable law; however, the filing of the bankruptcy case creates a stay of certain actions against the City,” the agency said.
Norris said the delinquent payments would not have any immediate effect on pension payments to retirees, but eventually could if the situation persists.
"Ultimately if payments are not made, they could be terminated and any available assets placed in our terminated pool," she said. "This means no additional contributions would come in, and benefits would be paid from what remained and how that pool is invested. That could possibly impact pensions."
A San Bernardino city spokeswoman could not be immediately reached for comment.
The city filed for bankruptcy protection after learning that its general fund faced a $46 million deficit. Since the filing, city officials have worked to develop a plan to slash costs. Last month, the City Council voted to approve a plan that would cut the city's general fund budget by about one-third.
Proposed cuts to the fire department became a sticking point, but earlier this month, the council passed the final piece of the plan, which would slash $2.9 million from the fire department budget by eliminating vacant positions and reducing engine crews from four to three people.
In the opening skirmish of a battle over how local governments deal with soaring pension costs, America's largest public employee retirement system made clear on Friday it would not tolerate a city deciding to miss a payment.The key here is what Denniston said, namely, whether we get precedent that CalPERS can be impaired in Chapter 9, making "municipal bankruptcy a very attractive business tool for any city that needs to restructure its debt."
The California Public Employees' Retirement System (Calpers) told bankrupt San Bernardino it may take legal action to force the city of 210,000 to resume its pension payments. And the $243 billion Calpers even threatened to sever its ties with the city altogether if it continues to be in arrears.
San Bernardino, a city 60 miles east of Los Angeles that has roughly 3,300 of its workers and retired workers in Calpers, has failed to make payments of more than $6 million to the pension system since it declared bankruptcy on August 1.
Calpers, one of the biggest pension funds in the world, serves many Californian cities and counties and has long argued that pension contributions to its fund cannot be suspended, even if a municipal authority is in bankruptcy. The dispute could become a big test case for financially troubled cities and counties in California and other states as they try to curb surging pension costs.
"These payments are required to be made under California law," Calpers said in an e-mail to Reuters. "If Calpers and the city cannot resolve the missed payments, Calpers will assert its rights and remedies available under applicable law."
Calpers spokeswoman Amy Norris said in a telephone interview that if the payments were not made and continued to fall due, "we will pursue collection through legal action."
Ultimately, Norris said Calpers had the right to terminate the city's pension plan. Any assets already in the city's pension fund would be placed in a termination pool, "and retirees' benefits will be reduced."
San Bernardino, which got in financial trouble because of the impact of the housing bust and financial crisis on tax revenues combined with generous pledges to employees when times were good, said in bankruptcy filings that its unfunded pension obligations to Calpers total $143.3 million. Calpers says it uses a different calculation method and pegs the debt at $319.5 million. The debt to the pension fund dwarfs the scale of the city's obligations to other creditors.
San Bernardino is the first Californian authority to hold back payments from Calpers or indicate that it might treat the pension fund like other creditors, including bondholders and insurers, during a municipal bankruptcy process.
"This is what makes the San Bernardino bankruptcy so fascinating," said Karol Denniston, a San Francisco lawyer who helped draft California's bankruptcy process law.
If San Bernardino and Calpers cannot reach a deal on the city's obligations to the pension fund, the city might move to reject its contract with Calpers under the bankruptcy process and treat it as any other unsecured creditor, she said.
That could mean seeking to reduce its pension obligations to Calpers - a strategy that other cities struggling with pension debts could imitate, Denniston added.
UNEXPLORED TERRITORY
"We don't have precedent here. But if we get precedent that Calpers can be impaired in Chapter 9 that's going to make municipal bankruptcy a very attractive business tool for any city that needs to restructure its debt," Denniston said.
Cities, counties and local governments seeking protection from creditors usually apply for Chapter 9, named for the section of federal bankruptcy law for local governments.
Many cities in California - and throughout the United States - face soaring pension costs. Many municipal workers earn less salary than those in the private sector but receive more lavish health-care and pension benefits. These rose during the years when the U.S. economy was growing at a faster pace, and home prices were booming, before the 2008 financial crash.
Gwen Waters, a San Bernardino spokeswoman, described the failed payments to Calpers as "deferred" and necessary to keep dwindling money available to finance the city's immediate priorities, such as payroll for its workers.
The missed payments could become part of a negotiated plan with Calpers that "can be added to future payments over an agreed-upon number of years," Waters said.
Two other Californian cities - Vallejo, which emerged from bankruptcy in 2011, and Stockton, which is seeking bankruptcy protection - decided to keep current on all payments to Calpers.
Vallejo asked other creditors to renegotiate or reduce their claims, while leaving Calpers untouched. Wall Street bondholders and insurers are already challenging Stockton's eligibility to file for Chapter 9 bankruptcy because it didn't treat Calpers like other creditors.
The case is number 6:12-bk-28006-MJ, United States Bankruptcy Court, Central Division of California, Riverside Division.
Should CalPERS be treated like other creditors when it comes to municipal bankruptcy? That is the key question, pitting labor vs. capital. Unions will argue that pensions are sacred and must be guaranteed under the law while creditors will argue that under municipal bankruptcy, all parties must be treated equally.
Keep an eye on this case because it could mark an important turning point for all US public pension plans. As the private sector looks to offload pension risk to insurers or offer lump-sum payouts to thousands of retirees, municipal bankruptcy might be used as a tool to 'restructure' all debts, including pension debt.
In that sense, there is some truth to what Mitt Romney said about "heading toward Greece," but not in the way he meant it. In Greece, harsh austerity measures and stupid decisions (like forcing pensions to buy Greek bonds) decimated public and private pensions. In the US, we're witnessing 'soft' austerity as pensions have become the 'evil noose' tying down corporations and municipalities, so they're both looking to curtail or offload pension risk using any means necessary.
Who gets screwed with all these harsh and soft austerity measures? Who else? Public and private sector workers who will have to work longer for much less benefits down the road. Don't get me wrong, some pension reforms are desperately needed, but I question the myopic focus on austerity, pension risk transfers and lump-sum payouts because such policies/ measures will only exacerbate economic inequality, condemning millions of people to pension poverty.
Below, Press Enterprise's Cassie MacDuff discusses San Bernardino's missed pension payments and says the mayor dismisses these media reports as "old news." Also embedded an old ABC7 news report on how San Bernardino is the poorest city in California and the second most impoverished city in the United States.
Speaking of crime and poverty, ABC World News recently showed a special report highlighting how children grow up in war zones of gang violence. Watch below, it's quite disturbing, and will only get worse.