REFILE-Two years after bankruptcy, California city again mired in pension debt

Tue Oct 1, 2013 1:06pm EDT

* Vallejo struggling to pay pension costs

* Pension fund, city's biggest creditor, only one not touched in bankruptcy

* City's plight a lesson to Detroit, other cities in bankruptcy

By Tim Reid

Oct 1(Reuters) - Less than two years after exiting bankruptcy, the city of Vallejo, California, is again facing a budget crisis as soaring pension costs, which were left untouched in the bankruptcy reorganization, eat up an ever-growing share of tax revenues.

Vallejo's plight, so soon after bankruptcy, is an object lesson for three U.S. cities going through that process today - Detroit, Stockton and San Bernardino, California - because it shows the importance of dealing with pension obligations as part of a financial restructuring, experts say.

The Vallejo experience may be particularly relevant to Stockton, which is further along in its bankruptcy case than Detroit and San Bernardino and has signaled its intention to leave pension payments intact.

All three current bankruptcies are considered test cases in the titanic battle between Wall Street and public pension funds over whether municipal bondholders or current and retired employees should absorb most of the pain when a state or local government goes broke.

"Any municipal bankruptcy that doesn't restructure pension obligations is going to be a failure because pension obligations are the largest debt a city has," said Karol Denniston, a municipal bankruptcy attorney in San Francisco.

"A city like Vallejo can be reasonably managed but it is still going to be flooded out because it cannot be expected to keep up with its pension obligations."

Calpers, the retirement system for California public employees, said it had "reached out" to Vallejo to discuss concerns. "Employers looking to cut costs have some options that can make benefits easier to manage in the near term, some of which Vallejo has already taken," Calpers said in a statement. "We are pleased Vallejo has remained committed to delivering on the pension promises it made to its employees."

Calpers is the largest pension system in the United States and serves many California cities and counties. It has long argued that it has a much wider responsibility than managing pensions for individual cities. It says state law mandates that it is the custodian of the entire fund, and as such is unable to renegotiate pension rates that cities have agreed to with their workers.

Vallejo, a port city of 115,000 near San Francisco that was staggered by the closure of a local naval base and the housing market meltdown, filed for Chapter 9 bankruptcy protection in 2008 with an $18 million deficit.

During its three-and-half year bankruptcy, the city slashed costs, including police and firefighter numbers, retiree health benefits, payments to bondholders and other city services.

The only major expense the city did not touch was its payments to the $260 billion California Public Employees Retirement System.

"We realized we did not have the time or the money to take on a giant behemoth like Calpers," said Stephanie Gomes, Vallejo's vice mayor.

Now city leaders say that growing, and unexpected, costs to Calpers are putting its post-bankruptcy budget under enormous strain. The city budget shows a deficit of $5.2 million for this fiscal year, and that is set to rise to $8.9 million next year unless significant cost savings can be found.

When Vallejo entered bankruptcy in 2008, its annual employer payments to Calpers were $8.82 million, or 11 percent of the city's general fund, according to the city's finance department.

When it exited bankruptcy at the beginning of 2011, the payments to Calpers were just over $11 million, or 14 percent of the fund. The latest budget pegs those payments at $15 million, or 18 percent of the general fund.

The increase comes largely from the recent decision by Calpers to lower its projected investment return rate, from 7.75 percent to 7.5 percent, and to change the way it calculates long-term pension maturity dates.

Those changes mean cities, state agencies and counties must pay rate increases of up to 50 percent over the next decade. Vallejo expects an increase in pension contribution rates of 33 to 42 percent over the next five years.

"Our five-year business plan was based on things we knew," said Deborah Lauchner, the city's finance director.

"Now we have to figure out a way to pay for these new Calpers rates. Every time we react to the last rate change they impose, they come up with another one. I understand they want to improve their funding status, but it's on the backs of the cities."

David Skeel, a bankruptcy law professor at the University of Pennsylvania Law School, said: "Vallejo made a conscious decision under enormous pressure not to mess with Calpers. That is a decision coming home to roost."

Marc Levinson, of the law firm Orrick, Herrington & Sutcliffe, was the lead attorney for Vallejo in its bankruptcy and has the same role for Stockton. He says his clients would welcome pension reform in California, and he is the first to say that contributions to Calpers are a big problem for cities.

But, Levinson said, dealing with the issue is no simple matter.

"How does a city start a new pension plan when it can't pay its bills?", Levinson said. "How can a city break away from Calpers and still retain employees when other jurisdictions have a pension plan?"

Vallejo has met in full its annual payments to Calpers since exiting bankruptcy, and even accurately projected them.

"But just because a cost is projected does not make it sustainable," said Lauchner, the finance manager.

Dan Keen, Vallejo's city manager, said the only way for the city to meet growing pension costs is to get more concessions from city unions - contract negotiations are underway - and to cut services further.

Keen said options were to slow or freeze hiring and make other cost cuts, for example, at the city marina. But he added: "The reality is we don't have anywhere else to cut."

Gomes, the city's vice mayor, said of Calpers: "It's the biggest part of my city's problem. I don't know any city that can afford it."

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Comments (3)
socalactuary wrote:
Sadly, much of the pension cost is for unfunded past service liabilities, the amounts that should have been paid in years past.
So the city is paying for its current services and being forced to pay for the benefits granted in the past. So find the money, or cut current costs/services. You owe your workers their pensions, so pay up.

Oct 01, 2013 12:42am EDT  --  Report as abuse
eatingdogfood wrote:
CA CHING, CA CHING, CA CHING! YEAH, IT MUST BE THAT TIME OF YEAR AGAIN! My Union Boss down at the Town Hall emailed me yesterday and.
Told me that this article was hitting the Papers today, and He told Me.
to make it Look like I was Working till this Blows Over in a week. I
know the routine! In a week, I’ll be back to my usual activity of.
Collecting A Paycheck for Doing Nothing! Hey, Private Sector.
Workers; You really gotta Pony Up more Taxes! I need at least a 10 %.
raise! My Cabin Cruiser at the Dock behind my Vacation House in.
Florida needs a New Engine. My wife has been after me for a new car.
She wants a BMW X6 G-Power Typhoon S! I told her I can’t afford that.
car. So then she says she will accept a Mercedes-Benz CL-Class and.
Nothing else! I also got Private School Tuition of $ 40,000.00 due.
in September. I got Credit Card Expenses coming out my AXX! That
new 3000 sq ft extension on my house raised my property taxes $ 15,000.
The maid and the housekeeper want raises. The gardener also wants a.
raise. You see Bunky; It ain’t easy in the Public Sector! So come
on Private Sector Worker; Pony Up and Pay More Taxes so I can afford to.
live here! You See; Life Is Not Fair, and the DemoRats will take.
care of Everything! HAPPY DAYS ARE HERE AGAIN!

Oct 02, 2013 1:15pm EDT  --  Report as abuse
bff426 wrote:
CALPERS is threatening to bring its legal muscle against any city that dares try and include pension costs in bankruptcy. San Bernardino and Stockton, along with any other California cities that go the bankruptcy route, need to combine their firepower to fight. It’s ridiculous to have police and firefighters retiring at more than 100% of their base pay after only 25 years on the job, due to loading up on overtime in the last few years, and the kick the can mentality of city negotiators. Added to the fact that the Democrats that controlled these cities were in bed with the unions they were negotiating with. But if they choose to ignore pension costs in their bankruptcy restructuring, so be it. Don’t be crying 3 years later, or 5, or 10 when you’re on the brink of bankruptcy once again. Lay down with dogs, wake up with fleas.

Oct 03, 2013 3:32pm EDT  --  Report as abuse
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