* 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
By Tim Reid
Oct 1Less 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
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
"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
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
"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."