Public pensions in California pass another bankruptcy test

By Dale Kasler

dkasler@sacbee.com

11/18/2014 9:10 AM - The Sacramento Bee

Public employees and retirees in California absorbed a potentially devastating court ruling a little more than a month ago: Pension benefits can be legally slashed if their employers go bankrupt.

The cities in a position to cut pensions, however, have shown no interest in doing so.

California’s two bankrupt cities, first Stockton and now San Bernardino, have agreed to pay CalPERS in full and keep their retirement plans intact, in spite of the October ruling by Sacramento bankruptcy court Judge Christopher Klein.

San Bernardino’s agreement, disclosed in a court filing late Monday, ends a lengthy impasse with CalPERS that had put the city’s employees’ and retirees’ pension plans in limbo. It came three weeks after Klein approved Stockton’s plan to follow the same strategy and pay CalPERS every penny – despite his October ruling that it was legal for Stockton to stiff the pension fund.

Taken together, Stockton and San Bernardino’s decisions suggest that, even if a judge says it’s legal, severing ties with the powerful California Public Employees’ Retirement System is extremely difficult as a practical matter. If Stockton had reduced payments to CalPERS, it would have triggered a mechanism that would have cut retirement benefits by 60 percent. Stockton officials say employees would have quit in droves.

“There’s been this kind of pension reform drumbeat; the reality is very much different,” said Teague Paterson, a Sacramento attorney who represents public employee unions. “For the people who actually have to run these cities and be responsive to the demands of citizens, (cutting pension benefits) is not that simple.”

With the cost of public pensions rising throughout California, the Stockton and San Bernardino bankruptcies have loomed as important tests of whether benefits could be curtailed. In Stockton, a creditor launched a major challenge to the city’s decision to keep paying CalPERS. San Bernardino actually withheld payments from CalPERS for several months after it filed for bankruptcy protection in 2012, racking up a past-due account of around $14 million. Some of the city’s elected leaders also made noises about trying to reduce San Bernardino’s ongoing $24 million-a-year contribution to the pension fund.

After months of legal sniping, San Bernardino and CalPERS announced in June they’d reached a tentative settlement. They were under a court-imposed gag order and couldn’t release any details until now.

In a filing Monday in U.S. Bankruptcy Court in Riverside, lawyers for the city said San Bernardino intends to “ratify in full the City’s relationship with CalPERS.” At a court hearing Tuesday, the city’s lawyers suggested San Bernardino wasn’t eager to pick a fight with the nation’s largest public pension fund, despite its earlier jousting.

“The 800-pound gorilla in the case is CalPERS,” said Paul Glassman, an attorney for the city, according to a report by Bloomberg.

The agreement calls for San Bernardino to repay CalPERS the overdue amount in 24 equal installments, with interest, starting in July of this year. So far, the city has paid $4.5 million of the past-due amount, said CalPERS spokeswoman Rosanna Westmoreland.

“We are pleased that the city of San Bernardino has made the right decision to fulfill the retirement security promises made to its employees,” CalPERS said in a prepared statement. CalPERS has been adamant that its member agencies fully pay their pension contributions.

The uncertainty over public pensions is far from over, however. Klein’s earlier ruling in the Stockton case – saying it’s permissible for a city to reduce pension payments – remains in the record and could tempt one or more of San Bernardino’s creditors to mount a challenge to the city’s decision to make peace with CalPERS. (The city won’t propose a plan for repaying its other creditors until next May.)

Pensions remain a hot political topic as well. An advocate of pension reform has been narrowly elected mayor of San Jose; he has vowed to continue the pension-cutting efforts championed by former Mayor Chuck Reed. Meanwhile, University of California officials say their controversial proposal to raise tuition 5 percent a year for five years is driven in part by the need to cover billions of dollars in unfunded pension liabilities. The UC Board of Regents will debate the proposal Wednesday.

“I don’t think that we’re out of the woods,” said Dave Low of Californians for Retirement Security, a group backed by some of the state’s largest public employee unions.

Those who are pushing for reduced public pension benefits in California say government entities should use every possible means to cut costs. Dan Pellissier, president of California Pension Reform, said San Bernardino will regret not having used the bankruptcy laws to reduce its bill to CalPERS.

“They missed a huge opportunity to make their community financially sustainable,” Pellissier said.

Pellissier noted that in the Stockton case, Klein ruled Oct. 1 that cities had the right in bankruptcy to wriggle out of their pension obligations. Klein’s decision came in response to an angry creditor, Franklin Templeton Investments, which argued it was unfair for Stockton to pay CalPERS in full while giving the investment firm just 12 cents on the dollar.

“Judge Klein told us … pension contracts are simply contracts with no special protection in bankruptcy court,” Pellissier said.

Just a month later, however, Klein ignored Franklin’s objections and approved Stockton’s reorganization plan, including its pledge to continuing paying CalPERS its roughly $29 million a year.

Experts said the judge was simply taking stock of the practicalities of the situation in his second ruling. A CalPERS official testified that, under state law, the pension fund would “terminate” any municipality that didn’t make full payments. CalPERS would then place the employees’ and retirees’ pensions in something called a “termination pool,” where the dollars would be invested extremely conservatively, earning minimal returns. The end result: Stockton’s pensions, which average $24,000 a year, would be cut an estimated 60 percent, a city consultant testified. The mass exodus of employees would render the city, which is struggling to get back on its feet, practically ungovernable.

Even Klein acknowledged the difficulties involved. “It would be no simple task to go back and redo the pensions,” he said.

Franklin Templeton is appealing Klein’s decision.