Moody’s: Deals With CalPERS Will Further “Weaken” Bankrupt California Cities

Three California cities – Stockton, San Bernardino, and Vallejo – have declared bankruptcy in recent years. But all three have struck deals with CalPERS to keep its citizens’ pension benefits intact.

That’s a win for pensioners, but Moody’s says the deals may not be healthy for the cities: they will have to pay large, rising contributions to CalPERS, and risk “weakening” their financial profiles in the process.

From Chief Investment Officer:

Moody’s said [San Bernardino] would face rising bills from CalPERS in the years ahead.

“San Bernardino’s choice to leave its accrued pension liabilities unimpaired means that its contribution requirements to CalPERS will likely increase to the point where they weaken the city’s financial profile, even after the relief provided by the bankruptcy adjustments,” said report authors Gregory Lipitz and Thomas Aaron.

The pair added that they expect similar “weakening” in both Stockton and Vallejo, two other Californian cities that have reached funding agreements with CalPERS following bankruptcy. CalPERS and the California State Teachers’ Retirement System have both been increasing employer contribution rates to deal with funding gaps and improvements in longevity.

“CalPERS’ latest actuarial valuations for each city forecast unrelenting increases to required contributions, despite the very strong investment performance of CalPERS in 2013 and 2014,” Moody’s said.

Actuarial projections indicate that by 2021, the three cities’ contributions could rise to between 30 percent and 40 percent of payroll.