Ruling could impact pensions

Ruling could impact pensions

Michele Ellson
courthouse

A federal judge who ruled earlier this month that a bankrupt California city’s pensions can be cut like any of its other debts is set to consider a contested exit plan that doesn’t contain pension cuts on October 30.

U.S. Bankruptcy Judge Christopher Klein ruled on October 1 that Stockton’s pension obligations aren’t more sacred than any other debt the city owes, clearing the way for potential cuts. But city leaders argued in court that they don’t want to cut pensions, fearing that cuts would impact the city’s ability to retain and recruit workers.

All of Stockton’s creditors have signaled their approval of the city’s plan to exit bankruptcy but one – San Mateo-based Franklin Templeton Investments, which is seeking to recoup more of the $35.1 million in bond debt the city owes than what’s included in the proposed exit plan.

The investment company argued that the city could pay back more of what it’s owed by cutting pension payments. CalPERS – the public pension behemoth that serves Stockton and most other California municipalities – argued that pensions shouldn’t be cut, a line it has consistently and aggressively taken in the face of several cities’ bankruptcies.

The pension ruling follows a similar one issued in December by the federal judge handling Detroit’s bankruptcy.

Assistant City Manager Liz Warmerdam said the ruling could offer cities “more options” than they now have to address fiscal crises, but noted that the ruling is only preliminary.

“It is probably wildly premature to speculate about what options, if any are available to a city such as Alameda,” said Warmerdam, who said the impacts of the ruling will likely be clearer in a year or two.

Members of Alameda’s City Council have shown no desire to cut pensions, saying they think workers deserve to get the benefits they were promised. But city leaders have succeeded in convincing city workers to pay more for their pension and health benefits in the face of rising costs – and have said they expect to ask workers to pay even more.

Alameda’s city employees shoulder more of the cost of their pension benefits than their counterparts in almost every other city in Alameda County, and they are also paying more toward their health benefits than when the recession began. And their unions agreed to allow the city to offer fewer pension and health benefits to new workers, who will also retire later than existing employees. The reduced pensions were required under a 2012 state pension reform act.

Leaders in many cities, including Alameda, have determined it would be too costly to exit CalPERS and create a city-sponsored retirement plan.

Alameda faced many of the same recessionary woes as its bankrupt counterparts, including multi-million-dollar budget deficits brought on by the poor economy and rising costs. So far, city leaders have closed the budget gaps by making dozens of layoffs, shuttering the city’s jail, handing off management of assets like the Alameda Animal Shelter and the Meyers House museum to nonprofits and using one-time funds like the transfer tax earned from the sale of Alameda South Shore Center to cover budget holes.

Budget figures the city released in June projected a reserve of $24.7 million at the end of June. But they also showed the city’s reserve disappearing by 2017-18 without any action due to rising costs that include increased pension costs.

Numbers the city provided to a local blogger projected that the city’s pension and retiree health costs could consume a growing share of the city’s budget over the next five years, rising to nearly $18 million by 2017-18. The rising pension payments are to cover recession-era investment losses that left the pension plan underfunded – losses that are entirely borne by the municipalities that invest in CalPERS.

Warmerdam said the deficit projections are based on “extremely cautious assumptions” and are in line with similar ones the city has published over the past several years – projections that repeatedly showed the city exhausting its reserves, something that hasn’t yet happened. She said city officials are “alert” to potential cost-cutting opportunities and that they’ve been working to grow revenues.

Preliminary estimates for the 2013-14 fiscal year, which ended on June 30, show that the city’s revenue growth was much higher than the city projected, she said.

California’s public employee pensions have long been considered a “vested right” protected by the state constitution, and cities have been reluctant to consider cutting pension benefits. Cities that have sought to cut pensions or avoid payments have found a fierce foe in CalPERS, which has battled in court and elsewhere to keep pension payments whole.

A Vallejo city councilwoman said the city chose not to pursue pension cuts out of fear CalPERS would wage a legal battle against them, creating a costly delay in the city’s efforts to reorganize its way out of bankruptcy. The city originally exited bankruptcy in 2011 without cutting pensions, but its leaders are facing fresh deficits and also, the prospect of going bankrupt once again.

Calpers also reportedly opposed the City of San Bernardino’s effort to exit bankruptcy after that city chose not to make a year’s worth of payments to the pension fund.

In the wake of its 2012 bankruptcy filing, Stockton residents said they saw an increase in crime after the city laid off police and left positions vacated by retirements unfilled.

The pension fund has filed a friend-of-the-court brief in the Detroit bankruptcy case, and its officers – who expressed disappointment in Klein’s ruling – praised Stockton for planning to maintain benefits.

“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,” CalPERS General Counsel Matthew G. Jacobs said after Klein issued his ruling.

CalPERS has downplayed the significance of the ruling, though media outlets reporting on it have said it could have broad implications for California cities with financial woes.

Kleinsaid federal bankruptcy law trumps state rules that seek to prohibit infringement on municipalities’ contracts with CalPERS, adding that state lawmakers who put the protections in place didn’t intend to bar cities that entered bankruptcy protection from cutting pensions.

Comments

Submitted by Robert Sullwold (not verified) on Wed, Oct 22, 2014

A little bit of additional information on employee cost-sharing for pensions and retiree health benefits:

• The pension reform law removed the cap on sharing by employees of the required employer contribution to CalPERS. For FY 2013-14, the City's employer contribution rate for public safety employees was 39.506%. Under the pension reform law, the public safety unions could have agreed to employee cost-sharing of half, or even all, of that amount. Instead, in FY 2013-14, public safety employees paid 3% of their wages toward the City's 39.506% employer contribution. (For FY 2014-15, the corresponding figures are 4% and 44.115%).

• Until January 1, 2014, the City picked up the entire of cost of providing health benefits to public safety employees and retirees; the employees and retirees paid nothing. As of January 1, 2014, public safety employees and "eligible" retirees are obligated to pay a percentage of the annual increase in insurance premiums (15% in 2014), not a share of the total cost. When the MOUs with this provision were approved by Council, staff estimated it would save the City an estimated $629,000 over four years. During the same period, payment by the City for retiree health benefits for public safety employees will exceed $15 million.