Were Vallejo officials pushed away from trying to cut pensions during bankruptcy by fear of a long and costly legal battle with deep-pocketed CalPERS, promised by attorneys representing the giant pension fund?
The bankruptcy of Vallejo, an old port city of 118,000 on San Francisco Bay, was widely watched as a possible way for struggling local governments to cut soaring pension costs.
But when Vallejo emerged from a 31/2-year bankruptcy last November, pensions were untouched. The city actually increased annual payments to CalPERS, reducing pension debt sooner.
Public employee unions, alarmed by Vallejo’s rare move in May 2008, sponsored several versions of legislation making it more difficult for local governments in California to declare bankruptcy under federal law.
Now before declaring bankruptcy, a bill signed by Gov. Brown last fall,AB 506, requires local governments to go through a neutral evaluation process or to declare a fiscal emergency due to public health and safety jeopardy and bills that can’t be paid.
CalPERS responded to the Vallejo bankruptcy by hiring the Sacramento law firm of Steven Felderstein, which was paid $451,000 through last November. The CalPERS board received regular closed-door briefings on the bankruptcy.
In December 2008, CalPERS filed a motion in federal bankruptcy court arguing that if Vallejo labor contracts were overturned, separate city contracts with CalPERS for pensions and retiree health care would remain in force.
Vallejo cut retiree health benefits, some bond payments and made other savings during bankruptcy. Big reductions in police and firefighter staffs and cuts in street and building maintenance could have been made without bankruptcy.
New labor contracts increased worker payments toward their pensions and gave new hires lower pensions, a step taken by many local governments. On a split vote during bankruptcy, the Vallejo city council gave police a 7 percent pay raise in July 2010.
U.S. Bankruptcy Judge Michael McManus in Sacramento overturned a Vallejo contract with an electrical workers union in August 2009, a first-of-its-kind ruling some experts said.
But by last year a Bank of America report quoted by CNBC, which said Vallejo had paid roughly $10 million in legal fees during a lengthy bankruptcy with little to show for it, reflected the view that the city had become a cautionary tale.
National media attention shifted to Rhode Island last August when Central Falls, a city of 18,000, went into bankruptcy. A number of public retirement systems in the labor-friendly state are seriously underfunded.
The Rhode Island state treasurer, Gina Raimondo, was the force behind legislation in November that switched current workers in the state retirement system into a cost-cutting “hybrid” plan combining a smaller pension with a 401(k)-style investment plan.
The legislation also raised the retirement age for current workers and suspended cost-of-living adjustments for the pensions of current retirees. In California, many believe the state courts have ruled that pensions promised current workers can’t be cut.
Retired police and firefighters in Central Falls agreed last month to a pension cut, a step a New York Times story said is “thought to be unprecedented in municipal bankruptcy and one that could prompt similar attempts by other distressed governments.”
The Times story on Dec. 19 by Mary Williams Walsh said the last city to go through Chapter 9 bankruptcy, Vallejo, planned to cut the pensions of current workers and retirees, but decided not to when CalPERS “threatened” a costly legal battle.
“Vallejo instead cut pay, health care and other benefits, as well as city services and payments to its bondholders, and left the pensions intact,” said the Times story. “Even though the bondholders faced a loss, all parties eventually agreed they had been treated equitably, and the state passed a law making it easier for Vallejo to continue borrowing.
“The episode strengthened the perception that public retirement plans were unalterable, even in bankruptcy.”
Asked for a comment on the Times story, a CalPERS spokeswoman, Amy Norris, e-mailed this reply:
“The CalPERS lawyer that worked on the City of Vallejo bankruptcy case confirmed with our outside counsel on the case, and the City of Vallejo’s bankruptcy lawyer that CalPERS did not make any threat to the City.
“We did inform the City that any attempt to reduce pension benefits in the bankruptcy case would go to the core of CalPERS mission and that CalPERS would respond accordingly. However, City of Vallejo never seriously contemplated cutting benefits and it quickly affirmed its contract with CalPERS. The NYT article was inaccurate or an exaggeration of the facts.”
Vallejo Councilwoman Stephanie Gomes, a pension reform advocate, e-mailed this reply when asked for a comment on the Times story:
“In bankruptcy, the City considered a number of options regarding reductions in existing employee compensation, current retiree health care and current retiree pension benefits. According to our lawyers, CalPERS’ outside bankruptcy lawyers told them that they would challenge any attempt by the City to reduce current retiree pensions.
“So while the City considered pursuing reductions of current pensions of existing retirees, we had to make our decision in light of the legal issues (primarily California constitutional and statutory protections), equity/fairness issues, and cost issues (CalPERS would likely have devoted significant resources to challenge the ability of the City to modify current retiree pension benefits).
“The 1,000-pound gorilla in the room when making our decisions was always CalPERS — they had a lot more time and money to fight us in court than we had available in the middle of bankruptcy.
“So we chose to avoid expensive litigation and to pursue critical budget reductions within the existing rules and regulations — we reduced compensation/health care benefits for most of our existing employees, reduced current retiree health care benefits, increased pension contributions from existing employees and created second tier pensions for new employees (not all groups got a second tier pension in bankruptcy — I hope we equalize this in this year’s contract negotiations). None of these were easy changes.
“Personally, I believe we need serious changes in how CalPERS is governed (i.e. adding an equal number of people who aren’t vested in a CalPERS pension to the Board to represent taxpayers, more strict rules on lobbying and gifts, and much more transparency and accountability); and their de facto control over municipal and county budgets via rules and regulations that constrain our budgeting options.”
Ed’s Note: Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/