MuniLand

A canary is singing in a coal mine in California. Canyon Lake, a city of about 11,000, has announced its intention to terminate its contract with CalPERS, the statewide retirement system. The small city has outsourced most of its public services and has two employees on its payroll, which it will shift from full time to part-time employment. According to Reuters:

Canyon Lake said it has looked at Calpers’s website, which states that its unfunded liability to the fund is $661,000.

Richard Rowe, Canyon Lake’s interim city manager, said the city decided it would be cheaper to borrow money to pay off Calpers rather than continue to pay the fund.

The city only has two full-time employees. Payments to Calpers for the pair will cost the city about $35,000 in the next fiscal year beginning July 1, Rowe said. If the city quit Calpers and turned those jobs into part-time positions with much lower benefit structures, the city would save about $88,000 annually in pension and health costs, Rowe said.

This effort is not the first to terminate a municipal entity’s relationship with CalPERS. From Reuters again:

Klein: apparent city will not be able to perform obligation to citizens if case is dismissed

— Ben Eisen (@BenEisen) April 1, 2013

Muniland turned a very big corner today when U.S. Bankruptcy Court Judge Christopher Klein determined that the insolvent city of Stockton, California had met the criteria for municipal bankruptcy. Stockton became the largest city ever to enter Chapter 9 bankruptcy. The admittance of Stockton to the protection of the court does nothing to address the central question of Stockton’s solvency: what can be done with the massive unfunded pension liability owed to CalPERS, the statewide pension system? Stockton itself has done nothing to address the problem. Judge Klein did have one very important thing to say:

Klein: CalPERS is a garden variety crditor that bears risk of loss #muniland

— Ben Eisen (@BenEisen) April 1, 2013

With this statement he mirrored the ruling of the Vallejo, California bankruptcy judge, Michael S. McManus, Jr., who specifically said in his 2009 ruling (page 73, clause 3102.1):

Things are heating up in the Golden State as bankrupt San Bernardino has stopped making payments to CalPERS, California’s public employee pension system. CalPERS, of course, had something to say about it. Reuters’ Tim Reid reported:

“These [pension] 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.”