CalPERS accuses San Bernardino of halting payments to the big pension fund in a plan to use bankruptcy to cut pensions owed workers. But the city says it’s simply unable to pay now and wants to work out a way to repay CalPERS over time.
A federal bankruptcy court in Riverside is scheduled tomorrow (Dec. 21) to hear a CalPERS plea to block or delay San Bernardino’s eligibility for bankruptcy, a key leverage point for creditors as CalPERS acknowledged in a court filing.
San Bernardino filed for bankruptcy Aug. 1, getting an automatic stay of debts. If the court rules that the city is eligible for bankruptcy, the leverage shifts to the city as it negotiates a plan to “adjust” or cut its debt to emerge from bankruptcy.
The court can rule on whether the plan of adjustment is fair, but cannot impose a plan. As the city noted in a filing: “The court can confirm a plan of adjustment even if some classes of creditors do not approve, a process known as ‘cram down.’”
Vallejo emerged from bankruptcy last fall with an agreement among all creditors, a process that took more than three years. City officials said they considered cutting pensions, but did not after CalPERS threatened a long and costly legal battle.
Stockton filed for bankruptcy last June and has an eligibility hearing scheduled Jan. 8. The city plans to eliminate its retiree health care coverage, but wants to preserve pensions unaltered to remain competitive in the job market.
San Bernardino became the first bankrupt city to halt payments to CalPERS, owing $6.7 million by the end of the month. The debt will total $13 million by next June, possibly $19 million if unions do not agree to pay half of normal costs under a new law.
The California Public Employees Retirement System called down the legal thunder, hiring a consultant to check San Bernardino books and a law firm that used strong language last week in a bankruptcy objection: “sham,” “extort” and “criminal.”
During bankruptcy, the filing said, the city intends “to mislead its employees into believing that they are receiving the full compensation promised to them while intending to reduce their pension benefits through a plan that will be forced on them at a later date.”
City payments to the pension fund are the same as wages, CalPERS argued, and the city plan for operating while in bankruptcy takes money that should go to the pension fund and spends it for other purposes.
“The city’s pendency plan would have the city’s employees continue to provide valuable services to the city, but allow the city to withhold full and prompt payment of the employee’s earned wages by withholding the required contributions to CalPERS,” the filing said.
The city stopped making the employer contribution to CalPERS but has passed along the smaller employee contribution. The term “pendency” used for the plan for operating while in bankruptcy is said to have originated in the Vallejo bankruptcy.
Only debt acquired before a bankruptcy petition is filed is properly protected from collection, CalPERS argues, and filing for bankruptcy should not be used as a cover for running up more debt.
“It is not mere speculation to say that the city may not be able to pay its post-petition bills after languishing in bankruptcy for an indeterminate amount of time,” said the CalPERS filing.
“To the contrary, the pendency plan suggests that the city has no intention of paying its postpetition obligations to CalPERS but, instead, intends to ‘modify’ those administrative claims in its plan of adjustment,” the filing said.
Although CalPERS argues that the city intends to “reduce their pension benefits,” the city pendency plan only mentions the need to maintain “competitive compensation” and an attempt to refinance pension debt.
“Defer the CalPERS payments less the employee withholding and negotiate repayment over time,” said the pendency plan. “Discuss the reamortization of the CalPERS liability with CalPERS actuarials.”
A chart in the 11-page pendency plan issued on Nov. 27 lists the $13 million owed CalPERS this fiscal year among $35 million in deferred general fund obligations, including $15 million owed other city funds.
“Assumes repayment at some future date to be negotiated with creditor and assumes resumption of payments in FY 2013-14,” the chart said of the $13 million owed CalPERS.
“Reamortize CalPERS liability over 30 years (fresh start),” the chart said at another point. “Discussions with CalPERS staff are underway; would realize value of $1.3 million per year starting fiscal year 2014.”
Only a small mid-manager union joined CalPERS in filing an objection to the bankruptcy. The city attorney, James Penman, told the San Bernardino Sun newspaper the city persuaded the three largest unions and bondholders not to object.
San Bernardino contends that a new finance director and city manager discovered in June that the city had a projected general fund cash deficit of $19 million as of July 31 and would be unable to make payroll.
The city blamed years of overspending, the housing bust, a declining local economy, sloppy bookkeeping and generous worker pay and benefits “sometimes significantly above the regional market.”
San Bernardino declared a fiscal emergency and bypassed mediation with creditors, a 90-day effort made by Stockton under a new union-prompted state law that emerged from the Vallejo bankruptcy.
The city said it is negotiating with creditors but needs to cut costs through its pendency plan to avoid service reductions that are “dangerous to our citizens” and threaten the “economic viability” of the city.
“Without restructuring its finances or maintaining the protection of Chapter 9 (bankruptcy), the city could not pay its employees, retirees, bondholders or vendors,” said the pendency plan. “This would result in uncontrolled default and, presumably, a collapse of public services.”
CalPERS said denial of bankruptcy “would not doom the city.” Unlike corporate bankruptcies, said the filing last week, the alternative to bankruptcy for cities is not liquidation of assets: Collecting on court judgments against cities is difficult.
“Denying eligibility may actually speed up the process by forcing the city to negotiate and come up with a plan now rather than just buying time by deferring payments to post-petition creditors,” said the filing.
The filing did not say whether CalPERS would be willing to let the city “negotiate repayment over time “ and get a fresh start to “reamortize” the pension liability over 30 years.
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/