San Bernardino’s plan to exit bankruptcy, possibly next year, cuts the pensions of 23 retired police officers who receive an unusual supplement to their regular CalPERS pension.
The supplement paid through a private-sector firm, the Public Agency Retirement System, boosts pensions to the same amount now common among police and firefighters, a standard set by the Highway Patrol in a CalPERS-sponsored bill, SB 400 in 1999.
San Bernardino’s plan to exit bankruptcy would distribute a $1.8 million trust fund to the 23 retirees and make no more payments to the supplement, which is said to be underfunded by about $3 million.
San Bernardino provided the PARS supplement from 2004 to 2008, when the 23 police officers retired, as a lower-cost way to be competitive in the job market before adopting the more expensive CalPERS formula that critics say is “unsustainable.”
“PARS plan retirees will be the only retired employees in the state of California to have their retirement compensation reduced through bankruptcy proceeding,” a member of the PARS retiree subcommittee, Robert Curtis, said in a court filing this month.
Curtis said unfairly reducing pensions up to 12 percent could result in personal bankruptcy, the loss of homes and health coverage, and other hardships. He asked for a city-provided attorney to represent the PARS retirees.
San Bernardino’s plan to exit bankruptcy would reject the PARS contracts, distribute a $1.8 million trust fund to the 23 retirees, and make no more payments to the supplement, which is said to be underfunded by about $3 million.
The city thought it had an agreement with the PARS retirees last month. But in a court filing last week, the city suggested the emergence of opposition since then could result in even less generous treatment of the PARS retirees.
New public pension supplements, like the one given the 23 San Bernardino police officers, are now banned under a pension reform pushed through Legislature by Gov. Brown three years ago.
Without cutting pensions, the San Bernardino plan is expected to produce a healthy general fund reserve of 15 percent or more through 2034.
San Bernardino can argue that phasing out the PARS supplement leaves the 23 retirees with the pension offered when they were hired, like other officers who retired before the supplement began in 2004.
But the same cannot be said of pensions from the California Public Employees Retirement System and other public retirement systems covered by the “California rule,” a series of state court decisions.
Public pensions can go up but not down — even if, as with SB 400, a pension increase is retroactive, immediately creating debt because the increase was not paid for by previous employer-employee contributions.
A San Bernardino disclosure statement filed Nov. 25 said the city had roughly $323 million in CalPERS pension unfunded liabilities when filing for bankruptcy in 2012.
“These unfunded actuarial liabilties were created primarily by the common council’s decisions to approve enhanced pension benefits to city employees in 2001 and 2007,” said the city filing.
Contributing factors, said the filing, were unfunded retroactive pension increases, heavy CalPERS investment losses during the financial crisis, and an increasing number of retirees with larger pensions and fewer active workers to help pay for them.
Without cutting pensions, the San Bernardino plan is expected to produce a healthy general fund reserve of 15 percent or more through 2034, according to an update issued by city consultants early this month.
City Manager Alan Parker, who clashed with Mayor Carey Davis, resigned effective Dec. 31. Last week Police Chief Jarrod Berguan was appointed interim manager until Mark Scott, Burbank city manager, takes the post Feb. 8.
U.S. Bankruptcy Judge Meredith Jury said in October she wanted more discussion of rising pension costs, given the “media perception” that Stockton and Vallejo are in trouble (strongly denied by the city managers) because they failed to cut pensions in bankruptcy.
San Bernardino has deeper problems than the other two cities: a lower average income and weak local economy, years of factional political infighting, and mismanagement that led to a new finance director discovering the city was on the brink of not making payroll.
After an emergency bankruptcy filing in 2012, San Bernardino took the unprecedented step of skipping its payment to CalPERS for most of a fiscal year, running up a debt of $13.5 million and risking termination of its CalPERS contract.
Hoping at first to get aid from CalPERS by stretching out payments, what San Bernardino got was a legal battle and a mediated agreement to repay CalPERS with interest by June 2016, followed by a penalty bringing the total to $18 million.
Regular San Bernardino general fund payments to CalPERS increased from $6 million in fiscal 2000-1 to a projected $22.6 million this fiscal year, said the November city filing.
CalPERS employer rates for San Bernardino police and firefighters were 14 percent of pay in fiscal 2000-1, 39 percent of pay in fiscal 2012-13, and are projected to be 60 percent in fiscal 2019-20.
A request from the San Bernardino bondholders to be treated the same as pensions was rejected by Jury last May, and the ruling is being appealed.
In other developments, City Manager Alan Parker, who clashed with Mayor Carey Davis, resigned effective Dec. 31. Last week Police Chief Jarrod Berguan was appointed interim manager until Mark Scott, Burbank city manager, takes the post Feb. 8.
Burrtec was selected in November to take over city waste management and retain full-time city employees, part of a strategy to cut costs by contracting for services. The city expects a one-time $5 million payment and annual savings of $2.8 million.
A federal appeals court last week upheld Judge Jury’s ruling that the city charter does not prevent contracting for fire services. Annexation of San Bernardino by the county fire district is expected to yield a $143 parcel tax and lower pension costs, netting $11 million a year.
At a hearing last week, Jury moved on from pensions and asked for an explanation of why the San Bernardino plan only gives some creditors 1 percent of what they are owed and does not raise taxes to pay more debt, the San Bernardino Sun reported.
Voters approved a 1-cent sales tax increase in Vallejo and a ¾-cent sales tax increase in Stockton. The San Bernardino plan would pay only about 1 percent of the amount owed on a $50 million pension obligation bond.
Among the major remaining opponents of the plan are the holder of the unsecured pension bond, EEPK, which is a subsidiary of Commerzbank of Germany, and the insurer of the bond, Ambac.
A request from the San Bernardino bondholders to be treated the same as pensions was rejected by Jury last May, and the ruling is being appealed. Mediation on Nov. 18 and 19 failed to produce a settlement.
Early this month in the Stockton bankruptcy, a federal appeals court rejected an appeal of a 1 percent payment on $30 million in unsecured bonds held by Franklin Templeton, which argued creditors were treated unfairly because pensions are untouched.
Jury predicted last week that the confirmation trial on the San Bernardino plan to exit bankruptcy will begin this spring or summer, the Sun reported. The fourth anniversary of the bankruptcy is Aug. 1.
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 Calpensions.com.