San Bernardino | Pension360

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.

Judge: San Bernardino Can Cut Firefighter Benefits

A judge ruled on Thursday that the bankrupt city of San Bernardino, California, could cut firefighter pension benefits as part of its bankruptcy plan.

The cuts would be in the form of higher pension contributions from firefighters and fewer hours of overtime. From Reuters:

In a tentative ruling, federal U.S. Bankruptcy Judge Meredith Jury said San Bernardino was entitled to unilaterally impose benefit cuts on the city’s firefighters, something their union had fiercely opposed.

Jury conceded that the cuts, which involve greater pension contributions by firefighters and reduction in overtime, were a hardship on the firefighters.

But she said the city had also been persuasive in showing that what it had been paying in terms of benefits to the firefighters was a financial burden, and being able to reject the firefighters’ collective bargaining agreement was a key step to forming a bankruptcy exit plan.

[…]

Last month the city reached an undisclosed deal with its police union. In June, it also reached a deal – subject to a judicial gag order – with its largest creditor, the California Public Employees’ Retirement System (Calpers).

The city only began face-to-face negotiations with some of its other large creditors – bondholders and insurers including Ambac Assurance Corp – last month.

The judge has made clear that it will not be before next year that she expects the city to produce a bankruptcy exit plan, known as a plan of adjustment.

San Bernardino filed for bankruptcy in 2012. It’s 2012 budget deficit was $45 million.

Could Detroit-Style Cuts Come to California?

Pension benefits, once thought safe, now stand on shakier footing than they ever have. Detroit’s citizens live in a state where pensions are protected by the Constitution, but that didn’t matter when a bankruptcy judge ruled that the city could cut worker pensions as part of its bankruptcy restructuring plan.

California workers are now wondering what this all means for them—particularly the workers in the bankrupt cities of Stockton and San Bernardino. The state heavily protects its pension benefits, present and future.

Still, the question on everyone’s mind is: Could Detroit-style pension cuts come to California? Ed Mendel explored that question in a post today on CalPensions:

U.S. Bankruptcy Judge Steven Rhodes, acting earlier than expected, ruled last December that Detroit pensions can be cut, even though the Michigan constitution says pensions are a “contractual obligation” that can’t be “diminished or impaired.”

The ruling that federal bankruptcy law allowing contract impairment overrides state law was appealed by unions. But the early ruling, along with potential loss of “grand bargain” financial aid, may have added to fear of deep pension cuts, influencing the vote.

A cut of 4.5 percent in active and retired general worker pensions and the elimination of cost-of-living adjustments was approved by 73 percent of voters. Leaving police and firefighter pensions intact but trimming their COLAs from 2.25 to 1 percent was approved by 82 percent.

In a brief supporting the appeal of Judge Rhodes’ ruling, CalPERS argued, among other things, that Detroit has a city-run plan and that an “arm of the state” like CalPERS cannot under federal bankruptcy law be impaired in a municipal bankruptcy.

The judge handling the Stockton case, U.S. Bankruptcy Judge Christopher Klein, has said one of his options is ruling on the general issue of whether CalPERS pensions can be cut without necessarily finding that Stockton pensions should be cut.

CalPERS filed the brief in question shortly after the Detroit ruling. The premise of CalPERS argument was that the Detroit ruling didn’t apply to them because Detroit is a city, while CalPERS operates on the state level.

But as Mendel points out, there are a few key similarities between Detroit‘s bankruptcy and those of California. From CalPensions:

Although differing on pensions, the Detroit and Stockton plans to exit bankruptcy are similar on retiree health care. Detroit announced last week that a 90 percent cut in retiree health care was approved by 88 percent of voters.

Judge Klein ruled in 2012 that retiree health care can be cut in bankruptcy, acknowledging the result may be “tragic hardships” for some. A Stockton retiree health care debt of $544 million was reduced to a one-time payment of $5.1 million.

Another similarity is that the Detroit and Stockton “plans of adjustment” to cut debt and exit bankruptcy face challenges from bondholders. Making little or no reduction in massive pension debt, but deep cuts in bond payments, is said to be unfair.

What happens in California will have a ripple effect across the country as cities nationwide are increasingly weighing the prospect of going through municipal bankruptcy proceedings. The judges presiding over these cases will be wading in uncharted waters—and their word will be law. Pension360 will be following subsequent developments closely.