A Stockton bankruptcy proposal does not cut pensions, but the city wants to eliminate $197.5 million in pension bond payments over the next 25 years, a plan opposed by the bond insurer that would be stuck with the tab.
The bankruptcy proposal would end pension bond payments from the troubled city general fund, which pays for most programs and is deep in the red with a $26 million deficit that could balloon if employee lawsuits overturn emergency pay cuts.
Stockton would continue to make $41.6 million in pension bond payments from city special funds that are in the black but restricted for uses such as water. These bond payments would be based on special fund employee pension costs.
The rationale for eliminating the main general fund payments on the pension bonds, but not on a half dozen smaller bond issues for parks and a number of structures, is that the pension bonds are not secured by leases, buildings or other collateral.
“This is an unsecured obligation, and the city does not intend to pay debt service moving forward except on the portion being paid from other than general fund sources,” said a 790-page proposal released Friday.
After Stockton filed for bankruptcy on June 28, U.S. Bankruptcy Judge Christopher Klein in Sacramento agreed to the city’s request to release the proposals, dubbed the “Ask,” that were made by the city during a 90-day mediation with creditors.
“The record will demonstrate that this city council did everything in its power to avoid bankruptcy,” Bob Deis, the city manager, said in a news release.
The pension bond insurer, Assured Guaranty, has said the bondsare guaranteed and will be paid in full. But the insurer, contending the bond proposal was unfairly “disproportionate,” accused the city of failing to pursue alternatives to bankruptcy.
Stockton issued $125 million worth of pension obligation bonds in 2007 to cover an “unfunded liability that was largely created by enhanced retirement benefits in the late 1990s and early 2000s.”
The city proposal said $124 million remains to be paid. With interest, the city is scheduled to spend $239 million paying off the bonds by 2038, about 62.6 percent from the general fund and 17.4 percent from special funds.
As in the Vallejo bankruptcy, the Stockton proposal cuts retiree health care but not pensions.
Although Stockton retiree health care, said to be among the most generous and expensive in the state, would be eliminated, the proposal is intended to strike a “balance” and keep the city as a “competitive” employer.
“Specifically the city has elected to target retiree medical care for restructuring, but to attempt and preserve pension funding for current retirees and current employees who will retire under the CalPERS system,” said the proposal.
The annual city payment to the California Public Employees Retirement System, listed as $16.8 million, is expected to jump to $22.3 million next year and nearly double to $30.2 million in fiscal 2020-21.
An additional payment for the pension bond is $7.7 million this year. Under the bankruptcy proposal, the city would make a $1.3 million pension bond payment from special funds and eliminate a $6.4 million general fund payment.
If Stockton succeeds in using bankruptcy for a major default, the increased risk may push up the cost of issuing pension bonds. In the view of critics, fewer pension bonds would not be a bad thing.
A large pension contribution borrowed through bonds can allow government employers to temporarily reduce regular pension payments. And if payments on the bonds are lower than pension fund investment earnings, the employer gains.
But pension bonds are a gamble, and Stockton’s issue in 2007 was ill-timed in the extreme. “Unfortunately, nearly one-third of the asset value was lost as stock market values dropped during the financial crisis,” said the proposal.
The bonds also are a fixed cost, lacking flexibility like pensions. When budgets are strained, employer pension costs can be reduced by getting employees to contribute more or by making actuarial changes that push costs farther into the future.
In two reports noting criticism of pension bond growth nationwide since the market crash in 2008 (even though interest rates are very low), the Los Angeles Times put the total issued last year at $5.2 billion, Bloomberg Businessweek at $4.96 billion.
Some of the pension bond issuers that rolled the dice and lost continue to issue more pension bonds, as if they are gamblers who stay at the table as losses mount, too deep in the hole to quit.
An Oakland pension system for police and firefighters, closed to new members in 1976 because of a funding shortfall, was intended to be financed with a property tax approved by voters in 1981, now costing homeowners an average of $419 a year.
But funding fell short again and Oakland issued a series of pension bonds: $417 million in 1997, $196 million in 2001 and $212 million this month. The city auditor said in 2010 that the city lost $250 million on the $417 million bond issue in 1997.
A city staff report on April 25 recommending the new bond issue said the city cannot afford to resume regular pension payments to CalPERS. The new $213 million bond issue is expected to allow Oakland to suspend CalPERS payments until 2019.
The pension system had 1,106 beneficiaries last year and one active worker, a 73-year-old police sergeant. The new pension bonds reportedly are being sold with interest in the “4 percent range,” well below the CalPERS earnings target, 7.50 percent.
Pasadena issued $47 million in pension bonds in March for a fire and police pension system closed to new members in 1977. There were two previous bond issues for the system with 275 beneficiaries: $100 million in 1999 and $40 million in 2004.
The small Pasadena system faces its own “fiscal cliff” in 2015. Property tax revenue for pension bonds authorized by SB 481 in 1987, now about $22 million a year, expires and an $81 million balloon payment on the previous pension bonds comes due.
The big-time serial issuer of pension bonds is the state of Illinois: $10 billion in 2003, $3.5 billion in 2010 and $3.7 billion in 2011. Illinois is faulted for not making required pension contributions and for an unusually high earnings forecast, 8.5 percent.
California started down the pension bond path when former Gov. Arnold Schwarzenegger proposed issuing a $949 million pension bond to make part of the state CalPERS payment in 2004.
His initial pension bond proposal, picked up from the administration of former Gov. Gray Davis, was scaled back to $500 million. But ruling in a Howard Jarvis taxpayers suit, the courts blocked the pension bonds, saying a vote of the people is needed.
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/