SAN BERNARDINO, Calif. — When this
bankrupt, working-class city took the unprecedented step in 2012 of stopping its
required pension contributions — arguing that it could not otherwise make
payroll — other financially stressed California cities took notice: Could San
Bernardino defy Calpers,
the powerful agency that administers the state’s huge pension system?
The resistance ended last year when
the city resumed its payments. But now, with a mayor who swept into office last
month promising to deal once and for all with skyrocketing pension costs, San
Bernardino is in another fight with Calpers
that could embolden other municipalities seeking relief from crippling payments
to the nation’s largest public pension system.
“We are under the microscope, no
question about it,” said Carey Davis, 61, the mayor. “San Bernardino took a
different approach in bankruptcy as related to pensions, and everybody is
waiting to see how it comes out.”
At issue is the $17 million in
back payments and penalties that San Bernardino failed to make between declaring
bankruptcy in August 2012 and resuming payments in July. Calpers has maintained
that it is owed in full. But now in bankruptcy negotiations, the city is hoping
to pay only a fraction of that, arguing that the city’s creditors must all share
in the bankruptcy pain. The amount may be small, given the system’s
assets,but if San Bernardino gets a reduction, the precedent
could be huge, opening the door to other struggling municipalities using
bankruptcy law to justify delaying or withholding payments to the pension
system.
“This city has taken on the
800-pound gorilla, which is Calpers,” said Ron Oliner, a lawyer for the San
Bernardino Police Officers Association, which represents the city’s uniformed
officers. “Everyone in California is watching San Bernardino, and everybody in
the nation is watching California.”
Calpers has for many years
resisted all efforts to allow cities, for whatever reason, to stop making their
required payments. (Federal law allows bankrupt companies to slow them greatly.)
While agreeing that “significant progress has been made in the mediation,”
Rosanna Westmoreland, external communications manager for Calpers, said the
pension system’s hands were largely tied by statutes mandating that all the
pension system’s participants make their full contributions on time and that no
workers’ benefits be reduced. “It is the law,” she said.
The problem is that it remains
unclear whether, in cases like this, federal bankruptcy law trumps state pension
laws. A federal judge hearing the Detroit bankruptcy case ruled, for instance,
that federal laws took precedence in that case, so the benefits of city workers
in Detroit could be reduced in defiance of state law. But Calpers has insisted
that this does not apply to the situation in California, an assertion that may
be tested in court, if the mediation provides no solution.
“With Vallejo and Stockton and
other cities, everybody is looking at pensions and those obligations,” said
Rikke Van Johnson, who, with 10 years in office, is one of the few remaining
veterans on the City Council. “We’re all in the same boat. Some of us are just
in a little deeper.”
Even before a recent wave of
municipal bankruptcies hit California, the California Public Employees’
Retirement System, known as Calpers, had also insisted that under state law, no
local government or public agency could reduce the benefits of current workers
or retirees.
Calpers handles the retirement of
public workers in dozens of agencies and municipalities across the state. With
roughly $280 billion in invested assets, there is little doubt it could absorb a
$17 million loss, but it has been unbending in its demands, including the
insistence that member cities cannot withdraw from the system without paying, in
effect, a hefty penalty.
These days, many cities in
California are finding it hard to keep up with the bills they get from Calpers.
San Bernardino’s annual contribution was $5 million in 2000, but had risen to
$26 million by 2012. Other cities like Stockton and Vallejo have tried to emerge
from recent bankruptcies without taking on Calpers’s demands, and have had to
balance their budgets by firing staff members and trimming services.
While San Bernardino officials
hope for a deal with Calpers to get the city out of bankruptcy, they caution
that any lasting solution to the high cost for public employee pensions would
involve changes to state law.
Mayor Chuck Reed of San Jose,
which is having its own public pension problems, has called for a statewide
ballot initiative in 2016 to deal with the issue, having decided that this year
was too soon to try such a wrenching change.
The city that Mr. Davis took over
in early March was already in bankruptcy, with pensions for city workers eating
up a steadily larger chunk of its annual budget. “The result is that roads,
parks, libraries were not being funded,” he said.
So the mayor was eager one recent
morning to show off San Bernardino’s gleaming new airport, built on the site of
a shuttered Air Force base, and to talk about other imminent city projects like
a new transit center, a new county courthouse and an express bus line running
from one end of the city to the other. The slope to economic recovery is a steep
one, though.
San
Bernardino International Airport, for instance, has everything an airport
needs, including ticket counters and jetways, except an airline committed to
flying into it regularly. So it sits dark and empty much of the time. The
express bus system will not start operating until late April. And the transit
center has only just broken ground.
For 35 years, Mr. Davis was an
accountant, and for much his career, he was in-house controller for a
manufacturing company in Los Angeles. It was while riding Metrolink, the
region’s rail system, that he noticed something.
“I would talk to the other
commuters, and I often would discover that even those who lived in San
Bernardino wouldn’t want to associate themselves with the city,” he said. They
would talk about living near other cities, or just speak vaguely about where
they reside.
“I found that to be a sad
commentary,” said Mr. Davis, a lifelong San Bernardino resident.
So, Mr. Davis said, he took it
upon himself to pore over city budgets going back many years. “You could see
that there were decisions, many decisions, that put us on this path over the
last decade,” he said.
Part of the reason for the
problem, he soon realized, was that more than a decade ago, Calpers allowed
cities to increase benefits for retirees. The state was flush then. But that did
not last, and cities that decided to go along with the higher benefits — like
San Bernardino — suddenly found themselves in a deep hole, forced to pay more to
make up for the losses suffered by the pension system. It got even deeper when
the markets crashed in 2008.
Mr. Davis went to a neighborhood
association meeting early last year and spoke up. Afterward, he said, others in
the audience urged him to run for office.
He had never even intended to seek
public office, he said, but the idea began to gnaw at him. He formed a committee
to explore a run. And then, to the surprise of many in the city, he won a runoff
against a veteran Council member.
“We are pretty much a city of
newcomers at this point,” said Allen J. Parker, the city manager. “Most of the
significant players have changed, very recently. I’ve only been on board since
November. The mayor has been on board for a few weeks.”
So far, said Mr. Oliner, the
lawyer for the police union, the union likes what it sees in the new mayor. But
is the union confident that city officials will see that all parties, including
Calpers, feel some of the pain of this bankruptcy?
“I think everyone is going to feel
pain,” Mr. Oliner said.
Rick Lyman reported from San Bernardino, and Mary Williams Walsh from New
York.