Author: Ed Mendel

Reporter Ed Mendel covered the California Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

A big question faces a new California board, Secure Choice, as it prepares to recommend an “automatic IRA” to the Legislature for the more than 6 million California private-sector workers not offered a retirement plan on the job.

If a worker is automatically enrolled in a new state-run retirement savings plan, and does not opt out, what happens if the plan’s investments lose money in one or more years?

Last week, the Secure Choice board narrowed its choice to two plans. One is a “dynamic asset allocation” that becomes less risky (and probably lower yielding) near retirement. There is no guarantee against losses, just like private-sector 401(k) plans.

The other plan is a “variable-rate savings bond” that has a “soft guarantee” to reduce but not prevent losses. In years with high yields from a pooled investment fund, some of the returns would be placed in a reserve for use later to offset future losses.

A third plan, said to be out of favor now, is a pension-like “variable annuity” with a guaranteed minimum payment based on peak savings between ages 55 and 65. Costs could be higher and retirement income lower, compared to the other two plans.

In what some call a retirement “crisis,” life spans and health care costs are increasing as Social Security and job retirement plans provide less support, while individual savings are minimal. Two dozen states have considered or enacted state-sponsored retirement plans.

A payroll deduction or “automatic IRA” is said to be a proven way to boost savings. President Obama tried to get Congress to create an “automatic IRA” before launching “MyRA,” a paycheck-deduction for bonds intended to be a “starter” for retirement saving.

The Obama administration gave the “automatic IRA” a big boost last month when U.S. Labor Secretary Tom Perez issued guidelines exempting the plans from a federal pension law (ERISA) that places reporting and other burdens on employers.

An exemption from the federal pension law is required by the legislation that created the Secure Choice program in California. The legislation also requires the state to have no liability for the payment of benefits under the new plan.

But a warning that a wave of new retirement plans, following the ERISA exemption, could create debt for California and other states was issued last month in a Wall Street Journal editorial, mentioned several times at the Secure Choice board meeting last week.

The Journal editorial raised several questions about the legality of the ERISA exemption, calling it “another attempt” by Secretary Perez to rewrite the law without congressional approval.

“To summarize: The Obama Administration is trying to socialize the private retirement investment business by creating subsidized public competition that will be another long-run entitlement burden on taxpayers,” said the Journal editorial.

In California, the legislation that created Secure Choice, despite opposition from taxpayer and financial industry groups, requires the plan to be self-sustaining and to result from a legal and market analysis not funded by the state.

A total of $1 million in donations, half from the Laura and John Arnold Foundation, was raised to hire Overture Financial for the market analysis and K&L Gates for the legal analysis.

The legislation creating Secure Choice (SB 1234 in 2012) was moved through the Legislature, after several previous failures, by Senate President Pro Tempore Kevin de Leon, D-Los Angeles, before he became the Senate leader.

He envisioned a “cash balance” plan similar to the one at the California State Teachers Retirement System, the Defined Benefit Supplement launched in 2000 with a decade-long diversion of a quarter of the teachers’ contribution to the pension plan.

“This type of retirement savings plan has a guaranteed rate of return, and participants would not be exposed on the individual market and vulnerable to the volatility of the unpredictable stock market,” De Leon said in a Senate bill analysis.

At the Secure Choice meeting last week, board member reaction to the cost and complications of the “variable annuity” plan with the guaranteed minimum payment was said to mean it’s not likely to be recommended to the Legislature.

“We see here three doors (plans),” said Mohammad Bakti of Overture Financial. “But in reality we are talking about the first two doors being feasible initially in the program, and the insurance part being more down the line.”

Bakti said modeling shows the “variable rate savings bond” plan with a reserve has the highest long-term returns. But it also has “political risk” from board decisions about crediting interest rates from the pooled fund and investment management.

In an apparent reference to the “dynamic” plan, a K&L Gates attorney, David Morse, told the board he thinks “the simplest approach is the best approach” to get approval from the legislature and the Securities and Exchange Commission.

Morse said his law firm believes that Secure Choice, as a state agency, is exempt from securities law. But he urged the board to seek an SEC letter clearly stating the exemption as a precaution.

“You are taking a risk that either the SEC or a participant would come in and sue, if their investment goes down, especially,” Morse said.

The startup cost of the Secure Choice plan is estimated by Overture to be $73 million, assuming that workers contribute 5 percent of their pay to the savings plan and 25 percent of the workers opt out.

The startup cost is an estimated $129 million if the worker contribution is 3 percent of pay. The legislation caps Secure Choice administrative expenses at 1 percent of total assets, paid from earnings on investments.

Expenses are expected to drop below the 1 percent cap in the fourth year of the program, slowly falling to 0.30 percent after 15 years. Overture said the gap between the cap and the declining expenses could provide the revenue to pay off a startup loan.

Some of the recordkeeping firms that could be hired to administer the Secure Choice program are willing to make a startup loan. But that would limit the choice of administrators to large firms and probably require a long-term contract.

Overture is recommending that the preset option for the worker contribution be 5 percent of pay, adjustable at individual request by percentage or dollar amount. The contribution might increase automatically, which some experts think is important.

The requirement that employers with five or more employees offer Secure Choice, or have an alternative retirement plan, would be imposed in steps over several years, not to exceed 100,000 employers per year.

The nine-member Secure Choice board chaired by state Treasurer John Chiang was expected to give the Legislature a recommendation for a new retirement savings plan by the end of this year.

“I believe the recommendation has to be submitted to the Legislature probably by the end of February,” Christina Elliott, acting Secure Choice executive director, told the board last week.

Photo by TaxCredits.net

Reporter Ed Mendel covered the California Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

As one of 13 CalPERS board members, J.J. Jelincic presumably has some authority. But last June and July, he filed Public Records Act requests to force CalPERS to give him weekly reports from its federal lobbyists, much like any member of the public.

CalPERS tripled its federal lobbying force last year from one all-purpose firm, the Lussier Group, to three separate lobbying representatives for retirement policy, investment and market regulation, and health care issues.

Jelincic wanted to see what CalPERS was getting for its increased spending. So he asked for the weekly reports from the lobbyists, as specified in their contracts. But the rest of the board had decided monthly reports, also specified in the contracts, are enough, and Jelincic’s informal request was denied.

The unusual Public Records Act requests by a board member helped trigger a CalPERS governance committee discussion last month of “board member behavior” that was clearly aimed at Jelincic. (See video of meeting here.)

In addition to filing the Public Records Act requests, Jelincic was criticized by other board members for “disparaging” staff in public and taking more than his fair share of time at board meetings by asking questions.

“We need to have some kind of policy where there are some strong consequences to avoid that kind of thing from happening,” said board member Henry Jones, referring to the public records request and disparagement of staff.

Jelincic is in the rare, if not unprecedented, position of being a CalPERS employee and board member. He has been a member of the investment office since 1986 and a member of the board since 2010 after his election by CalPERS members.

During his first year on the board, Jelincic was allowed to remain on the job. He was placed on leave around April 2011 and still collects his salary, $118,000 last year according to the Sacramento Bee state worker salary database.

Because of his dual positions, three opinions from the state attorney general say he should not participate in some board discussions and decisions, particularly if they are about top executives who might affect his supervision or pay if he returns to his job.

“How can you be a fiduciary if you can’t be involved in the people running the system?” Jelincic said last week of his fiduciary duty as a trustee to manage the retirement assets of CalPERS members.

Three attorneys asked to look at the opinions agreed they are wrong, Jelincic said, and the three attorneys also agreed on a rough road for righting the wrong: “If you want to spend $60,000 and four years, we can make them go away.”

One of the well-publicized disparaging remarks about CalPERS staff came last year after the board, excluding Jelincic, selected Ted Eliopoulos to be chief investment officer, replacing the late Joe Dear.

Jelincic told Pensions and Investments that he worked under Eliopoulos in the CalPERS real estate investment unit from 2007 to 2012, and “he doesn’t have the temperament or the management skills” to be chief investment officer.

As some have noted, Jelincic was censured by the CalPERS board in September 2011 for the sexual harassment of co-workers, verbally and with suggestive looks, after first being warned about complaints in 2009 by Eliopoulos and another official.

At the investment committee in August, Jelincic clashed with the chairman, Jones, while questioning staff at length about not knowing the profit share or “carried interest” paid private equity firms, which drew some criticism earlier in the national media.

Jelincic later complained in writing that staff had been inaccurate, evasive and condescending. While not agreeing that “decorum” had been breached, Jones scheduled a meeting with top staff. Jelincic walked out when not allowed to tape it.

After four years of data-system development, CalPERS last month issued one of the first reports of total private equity fees paid by a major pension fund. But some of the luster was dimmed by the criticism for not tracking the fees earlier.

A general issue that emerged at the governance committee last month is whether a board member, who disagrees with a decision of the board majority, should make their disagreement public or pursue change internally.

Robert Klausner, CalPERS fiduciary counsel, told the board that “external” action by a member can undermine a decision or policy adopted by a majority of the board.

“To go through the Public Records Act, or ask somebody else to do it, I think it undermines again the effectiveness of the mission of the board as a whole,” Klausner said, “and I don’t think that’s consistent with good fiduciary practice.”

Klausner’s remarks were sharply criticized by Susan Webber, writing as Yves Smith at her “Naked Capitalism” website. She also wrote a critique of Klausner’s work with a Jacksonville pension system and noted his lack of a California law license.

Last week, Klausner said his firm has two attorneys licensed in California. He said his role is “best practices,” not legal advice. He offered a detailed rebuttal of Webber’s critique, saying the issue was between Jacksonville and the pension fund, not with him.

At the governance committee, board member Richard Costigan said: “The concern I have with PRAs is what the “P” stands for. It’s public. I’m surprised we are having this discussion.”

On the other hand, Costigan said, the requests can be used to “paper people to death” and slow down an organization. He said in this case he was struggling with how the information requested by Jelincic should be released.

Board member Priya Mathur said her understanding is that what Jelincic now receives are summaries of email and other informal communications between lobbyists and staff, creating more work for the staff.

Klausner said the public release of half-developed thoughts might impede fully-developed thoughts. But some may want to know the components, he said, suggesting staff, the general counsel, and board members could work on a release policy.

Jelincic reminded his colleagues that the lobbyist contracts call for monthly and weekly reports. He said he knows there are interim emails, phone calls and other contacts between the staff and lobbyists.

“Those, quite frankly, are never identified as public records,” Jelincic said. “I would never ask for them.”

In a way, Jelincic is following in the footsteps of another CalPERS employee who became a board member. William “Scotty” Rosenberg, a CalPERS retirement advisor, retired in 1991 but did not become a CalPERS board member until 1993.

A Plan Sponsor article in July 1997 said Rosenberg “likes making waves, even if his fellow board members consider him a rabble-rouser.”

Presumably not to spend less time with Jelincic, the staff was asked to propose options this month for scheduling fewer CalPERS board meetings, a move to reduce preparation time for members and staff. The board currently holds monthly three-day meetings.

Reporter Ed Mendel covered the California Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

Using a new data system, CalPERS last week issued its first report on fees paid private equity firms, a type of investment that created a new class of billionaires and is criticized for debt-laden company takeovers resulting in job losses and bankruptcies.

Private equity has yielded the highest CalPERS investment returns, needed to reach a goal of earning an average of 7.5 percent a year, while providing some protection against stock market plunges.

Private equity also has given CalPERS its biggest scandal. A former board member, Alfred Villalobos, collected about $50 million in “placement” fees from firms seeking CalPERS investments.

Villalobos died last January, an apparent suicide about a month before his trial. A former board member who became the CalPERS chief executive, Fred Buenrostro, pleaded guilty to bribery-related charges for aiding Villalobos and awaits sentencing.

After the pay-to-play scandal surfaced in 2009, the California Public Employees Retirement System and the Legislature made a number of reforms. Several large private equity firms agreed to lower their CalPERS management fees.

In 2011 CalPERS began work on a data collection system, the Private Equity Accounting and Reporting Solution. A staff remark last April that CalPERS could not track big incentive payments and other fees drew criticism in the national media.

Last week the first report from the new system showed that since CalPERS private equity investments began in 1990, the private equity firms received $3.4 billion and the pension fund had net gains of $24.2 billion, an annual net return of 11.1 percent.

A CalPERS news release did not say how this compares to what is often said to be a typical “2 and 20” private equity fee structure — 2 percent for management and 20 percent of the profits after a basic amount, an incentive known as “carried interest.”

A New York Times report last week said the CalPERS disclosure of carried interest “could help to pave the way to more transparency in the private equity industry, historically one of the most secretive corners of the financial world.”

CalPERS has several kinds of private equity investments. The largest and most controversial is the “leveraged buyout.” Often a company is purchased, mainly with loans based on the takeover target’s own cash flow or assets, and then restructured and sold.

“Some see them as tools to streamline corporate structures, to rationalize meaninglessly diversified companies, and to reward neglected stockholders,” Inc. magazine said of the leveraged buyout. “Others see the LBO as a destructive force destroying economic and social values, the activity motivated by greed-driven predation.”

A list of “the 18 richest people in private equity” was published last March by Business Insider, based on a Forbes list of the world’s billionaires. Private equity also gets what critics say are major tax breaks.

Managers pay taxes on the 20 percent carried interest share at a lower capital gains rate, not at the higher ordinary wage rate. Some also get the capital gains rate on the 2 percent payment by waiving the fee and taking a larger profit share.

The pros and cons of private equity, or “benefit” and “challenge,” were outlined at the opening of a CalPERS board workshop held this month to provide a better understanding of the fees. (See chart below.)

Private equity, once a cottage industry, is said to now represent a “multi-trillion dollar” global industry, expanding investment options for pension funds, institutions and other large investors.

Private equity returns are usually higher than publicly traded stocks, but performance can vary widely among managers. Private equity investors are “limited partners” with little control over the “general partner” managers in private equity firms.

“The funds are blind pools,” Ted Eliopoulos, CalPERS chief investment officer, told the workshop. “When you go into them, you don’t know the investments that will be made subsequently by your external managers in these areas. So it’s hard to predict the characteristic and nature of the return streams that you will be receiving.”

In contrast to their lack of control over private equity firms, both CalPERS and the California State Teachers Retirement system have corporate governance units that use shareholder clout to push for change and reform in publicly traded companies.

On corporate boards, for example, pension funds and other institutional investors advocate diversity, majority vote, allowing shareholders to put candidates on corporate ballots, splitting chairman and chief executive roles, and controlling executive pay.

In 1985 the Council of Institutional Investors was formed mainly by pension funds. “Members use their proxy votes, shareowner resolutions on regulators, discussions with companies, and litigation where necessary to effect change,” says its website.

The late state Treasurer Jesse Unruh and others are said to have organized the council in response to “greenmail.” Corporate raiders would buy enough shares to threaten a takeover, causing the company to buy back the shares at a premium.

In the wave of leveraged buyouts that came later, private equity firms go beyond threats and actually take over a company, hostile or friendly, by getting enough investors and big loans to buy all of the stock and take the company private.

A private equity group, the Institutional Limited Partners Association, was formed in 2002. It’s an education, research and networking group, with little means to “effect change” beyond issuing guidelines and principles.

For better or worse, California public pension funds, once limited to bonds before voters lifted the lid in 1966 and 1984, are now arms of government that help shape the private-sector economy through large ownership stakes, active or passive.

Private equity is about 10 percent of the CalPERS investment portfolio. At the workshop, Eric Baggesen, a CalPERS investment official, said academics have suggested that private equity could be replaced by “levering up” a stock portfolio.

Baggesen gave several examples of how that switch would cause the “volatility” or risk of a major loss to soar and diversification to drop. “There are no obvious simple answers to finding alternative ways to express the private equity exposure,” he said.

Photo by TaxRebate.org.uk

Reporter Ed Mendel covered the California Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

CalPERS and CalSTRS both adopted plans this month to reduce the risk of major pension investment losses, a small step back for pension systems once required to keep all of their money in stable and predictable bonds.

A voter-approved measure in 1966 allowed public pension funds to invest up to 25 percent of their assets in blue-chip stocks. In 1984 voters approved another measure allowing all of the pension funds to be invested in anything deemed prudent.

With diversified portfolios mainly in stocks and other higher-yielding investments, the two big pension funds had little loss protection during the recent deep recession and stock market crash.

The California Public Employees Retirement System lost $100 billion, a plunge from $260 billion in fall 2007 to $160 billion in March 2009. The California State Teachers Retirement System lost $68 billion, a drop from $180 billion to $112 billion.

Despite a major bull market, the pension funds have not recovered. The CalPERS fund, valued at $295 billion, has about 74 percent of the projected assets needed to pay future pensions. CalSTRS, with $188 billion, is about 69 percent funded.

Big employer rate increases are under way. Over a phase-in period the average CalPERS increase will be roughly 50 percent. The CalSTRS increase for school districts will be well over 100 percent by the end of the decade.

The rate increases presumably have both pension systems on a path to reach full funding in three decades. But critics say it’s based on an overly optimistic forecast that investments will earn an average of 7.5 percent a year, concealing massive debt.

After the painful rate increases were enacted, the two big pension systems, as if following a trend, both spent a lot of time and study developing plans adopted this month that are expected to reduce the risk of another huge investment loss.

For the maturing systems, replacing losses is increasingly difficult. Retirees will soon outnumber active CalPERS workers. In both systems, annual pension payments exceed employer-employee contributions, requiring some investment sales to cover costs.

Experts have told CalPERS that if the funding level drops low enough, probably a range of 40 to 50 percent, getting back to full funding becomes impractical, requiring huge rate increases and unlikely investment returns.

The CalPERS risk reduction plan has drawn the most public attention because it could raise employer rates. The earnings forecast would gradually be lowered after years with strong earnings, perhaps to 6.5 percent after two decades.

Last week, the CalPERS board rejected a motion by a Brown administration member, Richard Gillihan, to phase in a rate increase that would lower the earnings forecast to 6.5 percent in five years.

Gov. Brown said in a news release the CalPERS risk reduction plan is “irresponsible” and based on “unrealistic” investment earnings. “This approach will expose the fund to an unacceptable level of risk in the coming years,” he said.

The CalPERS board president, Rob Feckner, replied that the “bold leadership step” that “pays down debt” emerged from talks with consultants, staff, stakeholders and concern about putting more strain on cities “still recovering from the financial crisis.”

The 3,000 local governments in CalPERS have a wide range of pension funding levels and ability to pay. CalPERS has encouraged employers, if they are able, to contribute more than their annual rate to pay down their pension debt.

Brown could propose a state budget that gives CalPERS more than the state rate, paying down state worker debt. But it’s likely to get stiff opposition in the Legislature, where lawmakers have other priorities and powerful unions want pay raises.

A Brown appointee on the CalPERS board representing local government elected officials, Bill Slaton, noted that state and local governments share the same giant investment fund (PERF), even though they have separate pension plans.

“I think the challenge here is if we were able to have two PERFs — one for state and one for locals — then I think we would be having a different discussion,” Slaton told his fellow board members last week.

Under the risk reduction plan, the CalPERS board will consider lowering the discount rate in years when investment earnings are at least 4 percent above the earnings forecast.

Unions have been assured the action is not automatic and will require a board vote. And the plan devised by the CalPERS chief actuary, Alan Milligan, avoids a direct employer rate increase.

Only half of the excess earnings lowers the earnings forecast. For example, annual earnings of 11.5 percent are 4 percentage points above the current 7.5 percent a year earnings forecast, the minimum needed to trigger the new policy.

Half of the excess, 2 percentage points, would be used to lower the earnings forecast, in this case by 0.05 percentage points. Some investments could then be shifted to less risky but lower-yielding investments, reflecting the new and slightly lower forecast.

The other half, 2 percentage points, cancels the increase in the employer rate resulting from the lower earnings forecast. But over time, a rate increase could still result because fewer good-year earnings offset years with below-forecast earnings.

A test of the new policy could come if CalPERS has a big investment loss in the future, followed by a rebound that yields earnings well above the 4 percentage point threshold. Would the board, possibly with many new members, vote for risk reduction?

Unlike CalPERS and other pension systems, CalSTRS only has tightly limited power to raise rates. It’s long-delayed increase for employers, teachers and the state was pushed through the Legislature last year by Brown and Assembly Democratic leaders.

The CalSTRS risk reduction plan gradually moves 9 percent of its investment fund to less risky investments. The type of reduced-risk investments are not expected to be determined until February.

Some of the strategies for risk reduction mentioned in a report to the CalSTRS board are long-term treasury bonds and several more exotic investments: trend follower managers, global macro managers, and systemic risk premia.

Employer and teacher CalSTRS rate increases were set by the legislation. But CalSTRS plans to adjust the state rate under a calculation that estimates what its debt or “unfunded liability” would be if the state had made no pension chances since 1990.

In a “fiscal outlook” report issued last week, Legislative Analyst Mac Taylor said the state CalSTRS contribution, $1.5 billion last fiscal year, is $1.9 billion this year, expected to be $2.5 billion next year, and then drop back to $1.7 billion in 2017-18.

The report said it’s unclear whether the new risk-reduction strategy or other factors might cause the CalSTRS board to lower its 7.5 percent earnings forecast in February, which would increase the unfunded liability.

“Should this scenario come to pass, state contributions to CalSTRS could be up to $1 billion higher than reflected in our main scenario beginning in 2017-18,” said the analyst’s report.

 

Photo by Stephen Curtin via Flickr CC License

Reporter Ed Mendel covered the California Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

First CalPERS announced last year that it was cutting the eye-popping pension of a former city of Vernon official, Bruce Malkenhorst, from $551,688 a year to $115,848.

Then yesterday the CalPERS board approved the recovery of a $3.5 million pension overpayment from Malkenhorst, 84, who retired in 2005 from the tiny industrial city south of downtown Los Angeles known for corruption.

Malkenhorst received the huge pension, later cut by an amount larger than any current CalPERS pension, for serving as the full-time Vernon city administrator/clerk, while also holding several other top city positions and reportedly earning more than $911,000 a year.

The CalPERS board began the recovery action after an administrative law judge agreed that the Malkenhorst pension should be reduced because it was based on final pay that was not properly disclosed.

“As the judge specifically found, Malkenhorst and other Vernon officials intentionally obscured Malkenhorst’s pay increases, making it impossible for the public to figure out how much the city was paying for what services, and subverting the law’s transparency requirements,” Mathew Jacobs, CalPERS general counsel, said in a news release.

“CalPERS will not tolerate these kinds of abuse. We remain on the lookout for all forms of pension spiking and encourage the public to help us root it out.”

An attorney for Malkenhorst, John Michael Jensen, told the CalPERS board the issue has become “highly politicized.” He warned against a “cavalier disregard for the legal framework of vested rights” by going back 10 years to recover $3.5 million.

“It’s a dangerous idea — that the idea of vested right property rights, which the board has been very vigilant about with the Stockton bankruptcy and these initiatives we have just heard about” can be changed by the administrative process, he said.

Whether this and other arguments from Jensen swayed some board members was not clear. The decision to affirm part of the administrative law judge’s decision and seek recovery of the overpayment was made in closed session on a 9-to-2 vote.

Malkenhorst pleaded guilty in 2011 (to long-stalled charges originally filed in 2006) of illegally using city money for golf, massages, meals and other things. He received probation, $35,000 in fines and penalties, and repaid the city $60,000.

An audit of Vernon begun by CalPERS in 2011 led to an original announcement in May 2012 that Malkenhorst’s pension would be cut because it “was illegally based on unpublished pay rates, overtime and an inflated longevity allowance.”

Malkenhorst contested the pension cut. CalPERS announced in March last year that his pension had actually been cut, citing a new appeals court ruling in an Oakland case “that retirement systems must correct overpayments sooner rather than later.”

After a six-day hearing stretching from August last year to February this year, an administrative law judge issued a ruling in July agreeing with the CalPERS decision to reduce the pension improperly based on a “catch-all pay rate category.”

But the judge said CalPERS acted arbitrarily in selecting the pay rate on which the new sharply reduced pension is based and lacked evidence to conclude that he was receiving overtime pay.

In September, the CalPERS board did not adopt the judge’s ruling, choosing instead to hold a full board hearing this month that would include the decision to begin the action to recover the overpayment of $3,486,191.

Jensen argued that the administrative law judge did not address the recovery of an overpayment and that board action would lack “due process.” A CalPERS attorney said recovery of an overpayment by the pension system is clearly allowed by state statute.

CalPERS based the reduced pension for Malkenhorst on the pay of the acting city clerk, arguing the “position most closely resembled the former city administrator/city clerk position the city had disclosed to the public on pay schedules.”

Jensen said Malkenhorst’s successor was paid $335,000 a year and that CalPERS had selected the lowest pay to determine the new pension. CalPERS said the acting clerk was the immediate successor and the higher-paid successor was hired several years later.

The Malkenhorst pension, $551,688 a year, tops the list of large California Public Employees Retirement System pensions on the Transparent California website of California public employee pensions.

Next are Michael D. Johnson, Solano County, $384,252; Stephen Maguin, Los Angeles County Sanitation District, $339,889; Joaquin Fuster, UCLA, $333,871; Donald Gerth, CSU Sacramento, $313,145, and William Garrett, El Cajon, $307,268.

When the Malkenhorst pension cut was announced in 2012, CalPERS also said it took action against six other Vernon officials. Three were ineligible for pensions because they were contractors. Others had service and pay discrepancies.

The Vernon crackdown came after CalPERS had cut the pensions of officials of the nearby city of Bell, some convicted of felony corruption. The top Bell official, Robert Rizzo, reportedly was on track to receive a pension of about $650,000.

Vernon only had a population of 112 in the 2010 census, the smallest of any incorporated California city. But the city website says it has 1,800 businesses employing about 55,000 persons.

Two families, the Malburgs and the Malkenhorsts, have run Vernon in the past, Forbes magazine said in 2007. Leonis Malburg, whose grandfather founded the city in 1905, was mayor for 33 years.

Malkenhorst, who began working for the city in 1977, became the treasurer and city administrator/city clerk in 1978. He later added several positions, including chief executive of the city-owned power plant that sells electricity to the businesses.

“During the height of his time in Vernon, Malkenhorst was driven around in a limousine and often spent his mornings playing golf,” the Los Angeles Times reported. “When he retired in 2005, he was succeeded by his son, Bruce Malkenhorst Jr., who left in 2008.”

A former Vernon city administrator and city attorney, Eric Fresch, who made $1.6 million in 2008, was found dead in the water off Angel Island in San Francisco Bay in 2012 hours after the release of a state audit critical of Vernon, the Los Angeles Times reported. The Marin County coroner’s office said he slipped while walking on wet rocks and hit his head.

A similar but possibly more mysterious incident opened HBO’s “True Detective” this year in which the fictional city of Vinci was based on Vernon, the show creator, Nic Pizzolato, told Vanity Fair and GQ magazines.

“After a series of investigative stories in 2010, the state Legislature attempted to disincorporate the city (Vernon), but that effort failed,” the Los Angeles Times reported last June.

“Since then, new leaders emerged and reform efforts were undertaken, including allowing the creation of private housing to boost Vernon’s population and slashing of city council members’ salaries.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

California State University employees pay less for their pensions and health care than other state workers, including members of a faculty union scheduled to demonstrate for higher pay at a CSU trustees meeting in Long Beach today.

The California Faculty Association, backed by a member strike authorization, has launched a “Drive for Five” campaign for a pay raise of 5 percent, rather than the 2 percent pay raise offered by the university administration.

As it happens, the gap between the faculty goal and the administration offer, 3 percent of pay, equals the gap between what CSU employees and other state workers pay for the same pension.

CSU employees contribute 5 percent of pay. The employees of other state agencies contribute 8 percent of pay. Both groups are in the “2 at 55” CalPERS plan, which provides a pension of 2 percent of final pay for each year served at age 55.

It’s an obvious inequity, if not a subsidy, because the contribution rate for the employers in both groups is the same: 25.1 percent of pay this fiscal year, projected to grow to 30.1 percent in five years.

(Under a cost-cutting reform Gov. Brown pushed through the Legislature, state workers hired since Jan. 1, 2013, are in new plans requiring longer service or an older age to earn a similar pension.)

The lower employee pension payment may not feel like a free ride for the California State University faculty union representing 26,000 employees, the largest of the 13 bargaining units on the 23 campuses.

“Faculty salaries lag behind the UC and California community college faculty salaries both in absolute terms and in relation to inflation over the last 10 years,” said the faculty union’s “Race to the Bottom” analysis.

“While the average faculty salary at the University of California rose from 2004 to 2013, adjusted for inflation, purchasing power for CSU faculty fell during the time period,“ said the analysis. “This disparity is most dramatic in San Francisco, where UC San Francisco average salaries rose $16,138, while faculty at San Francisco State lost $9,748.”

Is the CSU employee pension contribution an issue in the current labor negotiations? Spokeswomen for the CSU chancellor’s office and the California Faculty Association did not reply.

The powerful California Public Employees Retirement System does not control employee contributions. But it does set the annual contribution rates that must be paid by state employers.

Four years ago, the Brown administration requested separate rates for CSU employers because CSU employees, unlike other state workers, had not agreed to increase their pension contributions.

“We expect that having separate rates will result in state employers having to contribute $50 million less for the remainder of the fiscal year and CSU employers having to pay $50 million more,” CalPERS actuaries said in a staff report.

The CalPERS board rejected the proposal on a rare tie vote, 5-to-5 with three absentees. The vote was evenly split between members elected by active and retired employees and Brown appointees and representatives of the state treasurer and controller.

Now the governor’s state budgets have begun gradually shifting more of the CSU employer pension cost to the university system.

The state continues to pay the full CSU employer rate. But the amount the state gives CSU for mid-year adjustments to the rate, based on payroll and other factors, has been tied to the fiscal 2013-14 level.

As the payroll increases over the years, the state will pay a shrinking amount of the mid-year rate adjustment, requiring CSU to pay the remainder.

“This process is intended to increase budget transparency and helps hold CSU accountable for payroll decisions that are within CSU’s control,” said H.D. Palmer, the Brown finance department spokesman.

At the same time, he said, CSU is held harmless for employer rates that are outside of CSU’s control, such as CalPERS investment returns and changes in actuarial assumptions.

Another difference: CSU employees are in a “100/90” health care plan that pays 100 percent of the average cost of several plans and 90 percent of the cost for dependents. After retiring, they remain in the plan until eligible for Medicare supplement.

Other state workers are in a health care plan that pays 80 to 85 percent of the average health plan cost for retirees, depending on bargaining, and 80 percent of the cost for dependents. They receive the more generous “100/90” plan after retiring.

“My plan also will change the anomaly of retirees paying less for health care premiums than current employees,” Brown said in a 12-point pension reform issued four years ago.

The debt or “unfunded liability” for retiree health care promised state workers over the next 30 years ($72 billion) was greater last year than the unfunded liability for state worker pensions ($50 billion).

A Brown reform proposed last January would, through labor bargaining, switch state worker retiree health care from “pay as you go” to a pension-like “prefunding” with investments to help pay future costs.

Employee contributions to the retiree health care fund would be matched by the state. Some small state worker bargaining units, including the Highway Patrol, had already begun making payments for their retiree health care.

Brown also proposed adding five years to the retiree health care vesting period that begins with 50 percent coverage after 10 years of service and reaches 100 percent after 20 years. Yet another difference: CSU employees currently vest after five years.

State workers would be barred from receiving a higher health care subsidy in retirement than on the job. The governor’s proposal for an optional low-cost health plan with high deductibles, strongly opposed by unions, stalled in the Legislature.

Last month, state engineers agreed to a contract that phases in payments for retiree health care, extends the vesting period, and has a smaller retiree health care subsidy, the Sacramento Bee reported. Most state worker unions will negotiate contracts next year.

 

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Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

Former San Jose Mayor Chuck Reed and current Atlanta Mayor Kasim Reed have more in common than their last names. Both have the same broad pension story. But last week, Atlanta had a very different ending.

With growing pension costs eating into their city budgets, the two men pushed through reforms that could require employees to pay more for their pensions — up to 16 percent of pay more in San Jose, up to 10 percent of pay more in Atlanta.

Both were accused of pension reforms that led to police flight, depleting the force and reducing public safety. The two mayors, both lawyers, said city laws (the charter in San Jose’s case) say that pensions can be changed.

But in both cities, the employees or unions filed lawsuits contending their pension benefits are “vested rights,” protected by contract law, that can only be reduced if offset by a comparable new benefit.

Two years ago a superior court judge ruled the San Jose employee contribution increase violated employee vested rights. The city dropped the appeal this year in a settlement of the lawsuits against Measure B, approved by 69 percent of voters in 2012.

Last week the Georgia Supreme Court ruled the Atlanta employee pension contribution increase, approved by the city council four years ago, did not violate the vested rights of employees.

“Today’s ruling allows one of the most comprehensive and effective examples of pension reform in the United States of America to move forward,” Atlanta Mayor Reed said in a statement.

“Thanks to pension reform, 30 years from now the city will have saved more than $500 million and a pension deficit that was once protected to be over $1.5 billion will be zero,” he said.

For employers trying to cut pension costs, getting employees to pay more for their pensions can be important but difficult.

When the debt or “unfunded liability” soars, as happened after huge pension investment fund losses during the recession, it’s the employer or taxpayers who must pay to close funding gaps, not employees.

Employee rates are usually set by labor bargaining. Increases, if any, are relatively small. Some of the biggest come when employers, who agreed in bargaining to pay the employee rate, end the “pension pickup” or “employer paid member contribution.”

An extreme example of how employers pay more than employees is the city of Vallejo. The rate paid by police and firefighters, 9 percent of pay in CalPERS reports, was little changed during a 3½-year bankruptcy that ended in November 2011.

The employer rate, 28.3 percent of pay in 2009, is 57.6 percent of pay this year, and projected to be 72 percent in 2020. In the latest CalPERS report (June 30, 2013), the plan only had 64.6 percent of the projected assets needed to pay future pensions.

The powerful California Public Employees Retirement System, following projections by its actuaries, can raise employer rates. But CalPERS cannot raise the rates paid by employees.

A pension reform Gov. Brown pushed through the Legislature three years ago calls for a 50-50 split between the employer and employee of the “normal” cost, the pension earned during a year excluding the debt from previous years.

But the normal cost tends to be stable and a small part of total cost. In the Vallejo plan, the current normal cost is 18.6 percent of pay. The rate for unfunded debt from past years is twice that amount, 39 percent, bringing the total to 57.6 percent of pay.

The superior court ruling that blocked the San Jose employee contribution increase was based on what is often called the “California rule.”

A series of state court decisions, one in a 1955 Long Beach case, are widely believed to mean that the pension offered on the date of hire becomes a vested right, protected by contract law, that can only be cut if offset by a comparable new benefit.

The California rule was observed last year when the Legislature approved a rate increase for the California State Teachers Retirement System, which unlike CalPERS and other public pension systems has only tightly limited power to raise employer rates.

The teacher rate increase was limited to an amount said to be offset by a new benefit: An annual pension cost-of-living adjustment of 2 percent, a routine practice that could be suspended, was converted to a vested right.

Teachers and school districts had been paying nearly equal rates, 8 and 8.25 percent of pay, respectively. The teacher rate increase is a maximum of 2.25 percent of pay, increasing the rate for most from 8 percent of pay to 10.25 percent of pay.

The rate for school districts and other employers more than doubles, increasing in seven annual steps from 8.25 percent of pay to 19.1 percent of pay by 2020. A separate rate paid by the state, a total of 5.5 percent of pay, increases to 8.8 percent of pay.

Georgia is not among the dozen states that have adopted the California rule, according to Amy Monahan, a University of Minnesota law professor, in “Statutes as Contracts? The ‘California Rule’ and Its Impact on Public Pension Reform.”

The unanimous Georgia Supreme Court ruling cited several supporting rulings in Georgia courts while concluding that pension plans can be changed without violating vested rights, if change is clearly allowed by the pension contract.

The court said all three Atlanta pension plans contain language saying enrollment “shall constitute the irrevocable consent of the applicant to participate under the provisions of this act, as amended, or as may hereafter be amended.”

San Jose pointed to two city charter sections that say the city council has the power and the right to change, or repeal and replace, any of the city’s retirement plans or systems.

Superior Court Judge Patricia Lucas cited several California rule cases, including Allen v. City of Long Beach (1955): “Changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages.”

In the key part of her ruling on the rate increase, Lucas cited a state Supreme Court ruling, Legislature v. Eu (1991), and a footnote in a state appeals court ruling, Walsh v. Board of Administration (1992).

“Accordingly, this court concludes that a reservation of rights does not of itself preclude the creation of vested rights,” Lucas said.

Former San Jose Mayor Chuck Reed and former San Diego Councilman Carl DeMaio are leading a bipartisan group that is trying to put a pension reform initiative on the statewide November ballot next year.

After filing an initiative in June, the group refiled two initiatives last month, quickly amended. They want to avoid a ballot summary from Attorney General Kamala Harris suggesting the vested rights of current workers would be eliminated.

 

Photo by Joe Gratz via Flickr CC License

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

A board working on a proposal to enroll most small business employees in a state-run retirement savings plan, unless they opt out, was told last week that small technology-focused financial firms could do the job.

The founders of three firms that offer 401(k)s and other retirement plans to small businesses did not object to competition from the state. They offered their services, acknowledging that several small firms may be needed due to the size of the job.

“We’ve got the systems, the people to support this type of an initiative, and we are all excited,” said Pete Kirtland of Aspire Financial Services. “Whether or not we participate, it’s the right thing to do.”

Chad Parks of Ubiquity added: “You are looking at three companies here who have decided to tackle this problem. So, there are people out there who are willing and able to do this.”

Michael Kiley of Plan Administrators Inc. replied when asked about obstacles: “You could do a lot of damage in the design. You could make every one of us run away if you don’t involve us.”

The three firms at a Secure Choice board meeting last week are part of a growing number of small firms using modern computer technology to offer small businesses retirement plans with lower cost and more service, the New York Times reported in September.

Large traditional financial firms are said to often have higher costs because, among other things, they tend to focus on selling investment funds and to have outdated technology designed to serve a few employers with many employees.

The Secure Choice program was created to provide a job-based retirement savings plan for about 6.3 million California workers without access to one. Only 45 percent of workers age 25 to 64 have an employer plan, less than the 53 percent national average.

An “automatic IRA” or payroll deduction that puts money into a tax-deferred account, unless a worker opts out, is said to be a proven way to boost savings. There is growing concern that many private-sector workers have little more than Social Security.

“The lack of plans is fueling a retirement-savings crisis,” a Bloomberg news story said this month. “Few workers save anything outside of employer-sponsored plans. Only 8 percent of taxpayers eligible to set aside money in an IRA or Roth IRA did so in 2010, according to the IRS.”

Even big companies are concerned that employees aren’t saving enough. Google, Credit Suisse, Apache and others have begun automatically diverting more than the standard 3 percent of pay into 401(k) plans, the Wall Street Journal reported last month.

In Washington, D.C., there were two well-publicized meetings last month on the need for more private-sector retirement saving.

The Bipartisan Policy Center held a one-day conference on whether “technology, new business models, and different plan designs” could boost retirement savings, including for workers who have a job-based retirement plan but aren’t saving enough.

The U.S. Chamber of Commerce and other groups told a Congressional panel that “multiple-employer plans,” perhaps offered by state chambers and trade associations, could cut costs and ease administration, allowing more businesses to offer retirement plans.

President Obama made several unheeded calls on Congress to create an “automatic IRA” before launching “MyRA” last year, a paycheck-deduction bond savings program that is off to a slow start.

After years of trying, Sen. Kevin de Leon pushed a Secure Choice bill through the Legislature (SB 1234 in 2012) despite opposition from Republicans and employer, insurer, financial planner and taxpayer groups.

But Secure Choice must run an obstacle course: a legal and market analysis not paid for by the state, approval for IRA-like tax treatment, exemption from a federal pension law (ERISA), a self-sustaining plan, and final legislative approval.

With a $500,000 matching grant from the Laura and John Arnold Foundation (vilified by public unions for pushing pension reform), Secure Choice raised $1 million and hired Overture to do the market analysis and K&L Gates for the legal analysis.

The U.S. Labor department has not yet ruled on the ERISA exemption. Labor Secretary Tom Perez also is working on a contested “fiduciary” rule for brokers and financial advisers requiring them to act in the best interest of small business customers.

State Treasurer John Chiang is aiding Secure Choice with staff support, meetings with business groups around the state, and urging federal action during two trips to Washington, D.C.

De Leon, who became the Senate leader last year, is now in a stronger position to get final approval of a Secure Choice plan. Public employee unions support plans that would help close the gap between private-sector retirement and government pensions.

Yvonne Walker, president of the largest state worker union, SEIU Local 1000, is a member of the Secure Choice board. She joined Jon Hamm, Highway Patrol union executive, in a proposal at a legislative hearing in 2011 on Gov. Brown’s pension reform.

Look at ways to improve retirement security for private-sector workers, the two union officials told lawmakers, instead of only focusing on cutting public employee retirement benefits.

The California Chamber of Commerce and the California Manufacturers and Technology Association reminded the Secure Choice board in September that they only lifted their opposition to allow a feasibility study.

Among a long list of concerns in their four-page memo: The employer cannot bear the risk for employee investments or decisions or for an under-funded program, and the employer should not be given the burden of educating employees about the program.

“The market analysis has revealed that the target market for this program includes individuals who are risk averse and lack basic investment knowledge,” said the business groups. “The research suggests that the biggest challenge to the program will be positioning and explaining the investment options to potential users.”

The Secure Choice board was told last week that when employers with five or more employees are told that they have to offer employees a retirement plan, some may choose an alternative to Secure Choice such as an IRA or Simplified Employee Pension.

The discussion briefly turned to competing with brand names, lower-cost products and “adverse selection” if Secure Choice ends up with only employers ignored by the aggressive marketers.

“If in fact your desire is just to make sure that these 7 million people are covered,” said Kiley of Plan Administrators Inc., “candidly the day you put the mandate out you don’t have to do anything further. They will be covered. The market will see to it.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

Still underfunded after a $100 billion loss during the recession, CalPERS plans to slowly shift over decades to more conservative and lower-yielding investments, raising employer rates but reducing the risk of another financial bloodbath.

The Brown administration, repeating a request made in August, again urged the CalPERS board last week to promptly begin phasing in a rate increase over the next five years.

“I think we are missing an opportunity and putting off the day of reckoning, and it may come back to bite us,” said board member Richard Gillihan, Brown’s human resources director.

But the majority of the 13-member board, public employee union members and their allies, support the go-slow “risk mitigation” policy expected to be adopted in November or December after more than 1½ years of study.

“There are public agencies (local governments) that don’t have the money to move forward on a policy to reduce our risk right now,” said board member Theresa Taylor, elected by state workers.

In the fall of 2007, CalPERS had investments worth $260 billion and 101 percent of the projected assets need for future pension obligations. By March 2009, the investments had dropped to about $160 billion and the funding level to 61 percent.

Since then the Standard & Poor’s 500 index of big stocks has nearly tripled. But the California Public Employees Retirement System is only about 74 percent funded now with investments totaling $286 billion at the first of the month.

Experts have told CalPERS that in the maturing system, where retirees are beginning to outnumber active workers, some investment funds are needed to pay pensions, reducing earnings.

“It’s been very challenging to dig out of that hole,” Andrew Junkin, a Wilshire consultant, told the board last August.

CalPERS expects investment earnings to provide about two-thirds of the money needed to pay future pensions, with the rest coming mainly from employer contributions and a lesser amount from employees.

Critics say the CalPERS earnings forecast, now 7.5 percent, is too optimistic and overstates the projected funding level, concealing massive debt. The investments needed to support an optimistic earnings forecast have a higher yield because they are riskier.

For example, government bonds yield a certain amount with little risk of an investment loss. Stocks that can produce much bigger yields than bonds are more risky, because they also can yield big losses.

The risk mitigation policy shifts the focus from whether employer-employee rates are high enough to properly fund the system. The new policy seeks more investments that reduce the risk of another big loss and an even harder-to-dig-out-of hole.

The CalPERS board has been told that experts think if the funding level drops low enough, perhaps around 40 to 50 percent, it becomes impractical to push rate increases and earnings forecasts high enough to project full funding.

“If we have another event similar to ’08-09 then we reach a point where we can’t recover,” board member Bill Slaton, a Brown appointee representing local government elected officials, said at the meeting last week. “That’s what the industry tells us.”

The risk mitigation for a maturing CalPERS is long-term for several reasons. The amount of investments diverted to pay pensions will continue to increase. In two decades, poor investment earnings will require a proportionately larger rate increase than today.

Action now could result in another employer rate increase, putting more strain on local government budgets already facing a total rate increase of roughly 50 percent that is still being phased in.

Last year employer rates intended to get CalPERS to full funding in several decades were at record highs for some plans. Rates exceeded 30 percent of pay for more than 100 miscellaneous plans and 40 percent of pay for more than 150 safety plans.

“Employers are reporting that these contribution levels are putting significant strain on their budgets and limiting their ability to provide services to the people in their jurisdictions,” the annual CalPERS risk and funding report said last November.

The risk mitigation plan avoids a direct employer rate increase. In a year when earnings exceed the 7.5 percent forecast by at least 4 percent, half of the excess would be used to lower the forecast by 0.05 percent, allowing a shift to less risky investments.

The other half of the excess would be used to lower the employer rate, canceling out the rate increase that would otherwise result from lowering the earnings forecast needed to project full funding.

But in the long run, the risk mitigation is expected to indirectly increase employer rates because some of the excess from good years would be skimmed off, leaving less to offset the rate increase needed for years when earnings fall below the forecast.

This technical issue came up last week when Slaton suggested lowering the threshold for risk mitigation from earnings that are 4 percent above the forecast to 2 percent.

Alan Milligan, the CalPERS chief actuary, said lowering the threshold to 2 percent could result in a direct employer rate increase. He said excess earnings of at least 2 percent are needed to offset the rate increase resulting from a lower earnings forecast.

The plan to split the excess earnings, rather than use it all for risk mitigation, reflects the view of some board members who want employers to benefit from good investment years.

A staff report last week said the largest state worker union, SEIU, wants a policy requiring a board vote before risk reduction is triggered in a year with excess earnings. The staff believes the board already has that flexibility.

Among the 3,093 local governments in CalPERS there is a wide range of funding levels and employer rates. Some are contributing more than the required CalPERS rate to pay down their debt or “unfunded liability.”

Milligan said plans that are more than 100 percent funded cannot use the surplus to reduce their “normal cost,” which covers the pension earned during a year but not the debt from previous years.

A pension reform requires employers to contribute at least half of the annual normal cost. Milligan said CalPERS is considering creating a “pension prefunding trust” to help employers with a surplus lower their cost.

Board member J.J. Jelincic, elected by active and retired CalPERS members, is skeptical of the risk mitigation plan. He said earnings averaging 7.5 percent are “highly doable” over a long period.

Jelincic said he knows CalPERS staff is aware of academic work suggesting a more effective way to reduce risk would divide investments into a “hedging” portfolio and a “risk return” portfolio. He asked why the option was not presented to the board.

Ted Eliopoulos, the CalPERS chief investment officer, said the two-portfolio risk reduction method is being explored by the staff for discussion during the next round of asset allocation in about 2½ years.

“It would be a departure from our current asset allocation mix and wasn’t considered as an option for the risk mitigation process we have just gone through,” said Eliopoulos.

 

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Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

Pension cost cuts seemed unlikely after bankrupt San Bernardino agreed to repay CalPERS for skipped payments and adopted a recovery plan that only cuts bond and retiree health care debt, as in the previous Vallejo and Stockton bankruptcies.

Then this month U.S. Bankruptcy Judge Meredith Jury asked for more information showing that if she approves the San Bernardino recovery plan, rising payments to CalPERS will not push the city into a second bankruptcy.

“I don’t really think it’s in anybody’s objection, but the public perception — the media perception — of the two cities with confirmed (bankruptcy exit) plans, that being Vallejo and Stockton, is that they’re already in trouble because they didn’t impair CalPERS,” Jury said at a hearing on Oct. 8, as reported in the San Bernardino Sun.

“ . . . I don’t think there is adequate discussion of how much those raises are going to be. I have heard other things, I think in this court, that it is an exponentially increasing number that will have to be paid in order to keep retirement plans intact. There comes a point where no matter what I confirm it will fail.”

Actuaries hired by the city project that payments to the California Public Employees Retirement System will more than double from the current level by fiscal 2023-24, reaching $29 million a year, the Sun reported.

In the latest CalPERS report for the San Bernardino plans (June 30, 2013), the police and firefighters rate is forecast to rise from 38.8 percent of pay this fiscal year to 49.3 percent in fiscal 2020-21, the miscellaneous rate from 24.2 to 32 percent of pay.

Last week an editorial in the Riverside Press-Enterprise, noting the judge’s remarks on Oct. 8, urged Jury to “put pensions on the table” and “insist that San Bernardino renegotiate its unsustainable contract with CalPERS.”

Pension cuts have not been proposed by the bankrupt cities. Vallejo said CalPERS threatened a costly legal battle. Stockton said pensions are needed to compete in the job market. San Bernardino mentioned a “fresh start” to stretch out CalPERS payments.

But in a landmark ruling in the Stockton bankruptcy last year, Judge Christopher Klein said California pensions can be cut in federal bankruptcy court, despite CalPERS-sponsored state laws to the contrary.

San Bernardino may have a deeper problem than the two cities that have already exited bankruptcy, putting more focus on pension savings. The city filed an emergency bankruptcy in August 2012, saying it was in danger of not being able to meet its payroll.

During the rest of the fiscal year, San Bernardino did not make any of the required payments to CalPERS totaling $13.5 million. After a legal battle and mediation, the city agreed last year to repay CalPERS with interest and penalties, a total of $18 million.

The recovery plan issued last May said San Bernardino “evolved from a city that was the epitome of middle-class living into one of the poorest communities in the United States” with a median household income of $38,000.

Political and financial turmoil continues. Two former city officials made allegations of falsified budgets and possible illegal wrongdoing after the bankruptcy filing. In a recall in November 2013, voters ousted a city attorney and a councilwoman.

An unusual San Bernardino city charter linking pay to the average in 10 similar cities has given police two $1 million pay raises during the bankruptcy. A proposal to end the pay link was rejected by 55 percent of voters last November.

Mayor Carey Davis unsuccessfully asked City Manager Alan Parker to resign last December, blaming him for slow bankruptcy progress. Last month Davis vetoed renewal of a contract for the son of a former mayor, a consultant supported by Parker and others.

At a stormy city council meeting this month, there were public protests and heated exchanges between council members over the failure to complete audits of city finances during the first two years of the bankruptcy.

Davis said in hindsight he should have used his gavel to end the council argument. “I have a gavel, but I don’t want to wear it out,” the mayor told the Sun. “Bring in the FBI/Complete the audits!” said a sign carried by one resident.

The San Bernardino recovery plan does not ask voters to approve a sales tax increase, unlike the 1-cent tax approved in Vallejo and ¾-cent tax approved in Stockton. The plan does expect some indirect savings in pension costs.

Payment for a $50 million bond issued to pay pension costs would be cut to $500,000, a deep debt reduction contested in court by bondholders. Contracting with the county for firefighter services is expected to save $2.7 million a year in pension costs.

Actuaries have told the city that shifting firefighters from CalPERS to the San Bernardino County Employees Retirement System would immediately reduce annual pension costs because the county has more quickly paid down pension debt.

Few details of the $2.7 million reduction were given to the council at a meeting in August. A Calpensions Public Records Act request for the actuarial report was denied by the city attorney‘s office, which cited several exemption laws and rulings.

Last week Vallejo and Stockton officials sharply disagreed with the view that the failure to cut their biggest debt, CalPERS pensions, is pushing them toward a second bankruptcy. But they said service levels have not been restored.

“We are not at risk of a second bankruptcy,” said Daniel Keen, the Vallejo city manager. “We would emphatically deny there is a possibility of a second bankruptcy.”

In a budget message last June, Keen said his “cautious optimism” is tempered by large long-term cost increases for CalPERS pensions, workers compensation, and health benefits.

“These fiscal challenges will continue to severely constrain our ability to rebuild services and infrastructure and deliver the service levels that our residents deserve,” Keen said in the budget message.

In the latest CalPERS report for the Vallejo plans (June 30, 2013), the police and firefighter rate is forecast to rise from 57.6 percent of pay this fiscal year to 72 percent of pay in fiscal 2020-21, the miscellaneous rate from 32.7 to 41.2 percent of pay.

The Stockton city manager, Kurt Wilson, said the city continues to follow the long-range financial plan developed in bankruptcy and has had a series of favorable financial developments.

“As a result we currently have a 20 percent ($40 million) general fund reserve which not only places us in possibly the strongest financial position in recent memory, but combined with our forecasting, gives us one of the strongest fiscal foundations in the state,” Wilson said via email last week.

“While our service level will remain below what it was several years ago, we are meeting our current needs in a fiscally responsible way and are in no way near the financial condition that necessitated the bankruptcy,” he said.

In the latest CalPERS report for the Stockton plans (June 30, 2013), the police and firefighter rate is forecast to rise from 45.5 percent of pay this fiscal year to 58.1 percent in fiscal 2020-21, the miscellaneous rate from 22.4 to 29.5 percent of pay.

 

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