San Bernardino misses pension payments to CalPERS

Published Saturday, Oct. 20, 2012 - The Sacramento Bee

By Dale Kasler

It was a given: A government pension in California was good as gold.

But that promise is being tested as never before. The latest threat comes from the bankrupt city of San Bernardino, which has stopped making its regular pension payments to CalPERS.

The California Public Employees' Retirement System said Friday that San Bernardino has withheld $5.3 million worth of payments since filing for bankruptcy protection in August.

Nobody has stopped getting their pensions yet, but experts called the city's move a direct challenge to the powerful CalPERS, the largest public pension fund in the nation. Other financially distressed local governments could take similar action as they look to conserve cash, said Karol Denniston, a municipal bankruptcy lawyer in San Francisco.

"The playbook is changing," she said.

CalPERS spokesman Brad Pacheco said the pension fund is in discussion with San Bernardino officials. "If we can't resolve the missed payments with the city, CalPERS will assert its rights and remedies available under the law," he said.

One potential remedy: CalPERS could terminate San Bernardino's pension program. The money already contributed by the city over the years would go into a special fund, and pension benefits would be allocated depending on how well CalPERS could invest that money. That would surely mean retirees would get less than they were promised.

For the time being, however, CalPERS isn't cutting off anyone's retirement checks. "The retired employees are not being impacted," said Steve Turner, president of the San Bernardino Police Officers Association.

"CalPERS is working with the city, they're trying to work out a plan," Turner added. "We are keeping a close eye on it."

San Bernardino's decision is part of a gathering storm in the public pension arena.

Following Stockton's bankruptcy filing earlier this year, two bond-insurance companies owed millions by the city have gone to court to cut off Stockton's payments to CalPERS. That battle is still pending.

And in San Jose and San Diego, voters this summer passed ballot initiatives to curtail pension benefits for current and future workers. Unions have gone to court to fight those decisions.

Corporations have been canceling pension plans for years. There's even a federal guaranty fund, comparable to the FDIC's program for covering bank deposits, to compensate private sector employees who lose their pensions.

But this is fairly new ground for public pensions. Just four years ago, when Vallejo considered slashing retirement benefits as it struggled through bankruptcy, all it took was a threat of a lawsuit by CalPERS to get the city to scrap the idea.

"CalPERS was too big to take on," Denniston said, referring to Vallejo's reluctance to fight over pensions. But that attitude is changing as municipal finances become more desperate, she said.

"The CalPERS question needs to be addressed," she said. "These obligations (to CalPERS) aren't going to take care of themselves. The economy isn't going to save you and neither is the state."

Because of a grace period, San Bernardino is delinquent on $1.2 million, even though it has skipped a total of $5.3 million in payments to CalPERS. City officials said they've had little choice as they wrestle with a severe cash crunch.

"In order to meet the city's highest priorities, to keep core services going, we've had to miss some CalPERS payments," said Jim Morris, chief of staff to Mayor Patrick Morris, his father. "We're doing this in order to meet payroll."

Morris said the city isn't sure yet if it's merely delaying payments – or will try to restructure its obligations altogether in order to reduce the amount of money it sends CalPERS. The city is supposed to pay the fund $24 million a year.

Outside of payroll, CalPERS is the city's largest single expense, Morris said.

He added that San Bernardino is skipping plenty of other payments. "It's not like we're singling out CalPERS," he said. "We've got millions of dollars in outstanding invoices."

"We're trusting we're going to be able to work this out with CalPERS," Morris added.

CalPERS isn't anxious to let San Bernardino renegotiate the amount of money it owes – a step that could create a precedent for other cash-strapped governments to seek relief. "CalPERS intends to enforce all of the obligations that the city of San Bernardino owes to the system," Pacheco said.

James Spiotto, a Chicago lawyer and municipal bankruptcy expert, said San Bernardino simply might not have the money CalPERS is demanding.

"If you don't have the money, you don't have the money," Spiotto said.