San Bernardino’s coming pension brawl

October 19, 2012

The bankrupt cities San Bernardino and Stockton, California share similar fiscal woes. Both include very high employee pay and benefits. Both have sought the protection of Chapter 9 municipal bankruptcy and are shielded by the courts from any new litigation. The court protection gives the cities time and fiscal space to negotiate with employees and creditors, and to organize their financial affairs. It’s hard to imagine the difficulty of running a city in bankruptcy with dwindling cash reserves.

Stockton and San Bernardino have taken very different approaches to how they will manage their cash reserves. Each approach will likely have big effects on how their bankruptcy processes play out.

Stockton has chosen not to challenge CalPERS, the statewide pension system, and has continued to pay the monthly pension contribution for its employees. The city’s unwillingness to ask CalPERS to negotiate has caused other Stockton creditors – the bond insurers – to challenge whether the city has met the conditions of a Chapter 9 bankruptcy. The blog Public Sector Inc describes the situation:

The city manager of Stockton, writing in the Wall Street Journal, has taken the same position as Calpers, namely that the city won’t seek to reduce pensions for employees through bankruptcy court. He’s being challenged, however, by other creditors in the case, who have argued before the bankruptcy judge that Stockton should be kicked out of Chapter 9 because it hasn’t made a meaningful attempt to reduce its pension debt.

San Bernardino, on the other hand, has stopped making pension contributions to CalPERS. Reuters reports:

Since July 31, the day before San Bernardino declared bankruptcy, the city has failed to make six biweekly employer contribution payments of more than $1 million to the California Public Employees’ Retirement System (Calpers), a city spokesperson said.

How San Bernardino deals with its future obligations to Calpers remains to be decided, but even opening the door to negotiating payments to Calpers is significant, said Karol Denniston, a San Francisco lawyer who helped draft California’s bankruptcy process law.

“This is a David and Goliath approach of taking it head on,” Denniston said, referring to the halted payments. “San Bernardino has taken on Calpers without even filing a motion,” she added.

Since Vallejo, another bankrupt California city, did not challenge employee pay or pension benefits in their Chapter 9 proceeding, it was unable to reduce those expenses, even when they constitute the majority of the city’s budget. Public Sector Inc. mapped out Vallejo’s employee costs post bankruptcy (see below).

The pension contribution that Vallejo is making for firemen, $43,954, is about the average starting salary for a New York City fireman, at $39,400. It’s hard to see how salaries this high would be sustainable without taxes going to astronomical levels.

San Bernardino, where the mayor is a former judge, has been having conversations with CalPERS to discuss its options after stopping payments. The Sacramento Bee reports:

CalPERS spokesman Brad Pacheco said the pension fund has been talking to the city about the missed payments. “If we can’t resolve the missed payments…CalPERS will assert its rights and remedies available under the law,” he said.

Ultimately, the San Bernardino pension program could be terminated, and the dollars contributed by the city to CalPERS over the years would be put into a special fund. No more money would be contributed, and the pension program for city workers would depend entirely on how that remaining pool of money is invested.

San Bernardino’s move to skip its CalPERS payments is a game-changer. It opens the door to reducing pension payments for its current and future retirees. It’s likely that San Bernardino will encounter significant legal costs, but those costs must be weighed against potential savings. Many will ask how San Bernardino will deal with the exodus of police and firemen following this move. The truth is that the city will be able to hire many more employees at more reasonable salary and benefit-levels. It really shouldn’t cost a community over $200,000 to compensate a safety worker.

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