Bankruptcy

These Bay Area cities are facing the greatest financial risk, state auditor says

October 25, 2022 By Katie Lauer 2 Comments

The online dashboard calculates each city’s ability to pay its bills, based on risk factors such as pension funds and benefit obligations.

The state retirement system that oversees pension benefits for 2 million public employees, retirees and their families has long been described as a ticking time bomb, a looming crisis and a can that elected officials keep kicking down the road.

After swimming in cash following the halcyon dot-com boom in the 1990s, the state promised public employees more money and benefits than could realistically be paid out decades later, especially since many plans pledged to support retirees until their deaths. Overall, reports indicate that CalPERS – the California Public Employees’ Retirement System – is now hundreds of billions of dollars short.

In order to afford burgeoning payments to CalPERS, some cities have cut staff rosters, reduced program services and increased taxes. But other governments – drowning in debt – have also declared bankruptcy and scrapped their retirement plans.

It’s a statewide dilemma, but several Bay Area cities now face “moderate risk” of strained financial futures because of their unfunded pension obligations, according to the state auditor’s latest ranking of California’s 482 cities.

Regionally, Richmond earned the worst overall grade, landing 10th on the at-risk cities list for fiscal year 2020-21. Not far behind, Oakland ranked 11th and El Cerrito 13th. San Jose landed at No. 20.

Notably, each of these four cities has the undesirable honor of sharing the No. 1 spot – alongside more than 30 other cities – as local governments least prepared to tackle future costs of employee pensions and benefits.

The state’s online dashboard, created in 2019, provides a snapshot of financial health that allows Californians a transparent, digestible look into how their tax dollars are being spent. It calculates each city’s ability to pay its bills based on risk factors from the previous fiscal year, measuring general fund reserves, debt burdens, liquidity, revenue trends, pension funds and benefit obligations.

San Jose

Crafting a solution to looming unfunded pensions has plagued San Jose for years, resulting in two ballot measures to lower costs to taxpayers. San Jose’s pension and retirement costs declined with high returns on its investments, but funding to fulfill its current pension liabilities ranks second worst in California – only behind Compton.

The city’s $3.5 billion in pension liabilities accounted for 132% of the $2.7 billion the city collected as revenue in 2020-21 and last fiscal year’s $385 million CalPERS pension contribution swallowed up 14% of the city budget’s revenue.

Additionally, San Jose has only funded $5.9 million of its $9.5 million in accrued pension liabilities.

Jim Shannon, the city’s budget director, says he isn’t too worried. Pension costs are still higher than city officials would like – around 18% of the 2022-23 budget – but Shannon said San Jose is in a period of stability.

“I think we’ve taken our medicine and we’re in a pretty stable place – actually a better place than we have been in quite some time,” Shannon said.

Richmond

Richmond’s pension-related obligations exceed its annual $302 million in revenue by 173%, meaning that annual CalPERS payments “will likely strain the city’s financial resources,” according to data from the state auditor’s office.

While the city of 115,000 is one of the most troubled when it comes to preparing for future pension payments, Richmond Mayor Tom Butt cited a special tax that adds an additional charge on property tax bills that flows directly into benefits plans.

“We’re kind of in better shape, whereas some other cities might have to just take that out of their general fund,” Butt said. “Our special taxing mechanism that helps us pay sort of mitigates the problem.”

However, the state auditor’s dashboard shows that Richmond’s looming pension costs still pose a threat to maintaining city services and priorities at satisfactory levels.

This past fiscal year, CalPERS billed Richmond $37 million in pension contributions – accounting for 12% of the $303 million revenue flowing into the city’s coffers.

According to CalPERS’ projections, that payment will rise to $53 million – 18% of revenue – by 2028. And that’s based on current market conditions; a recession could hike those rates and deal a blow to revenues in the coming years.

While Butt places some blame for the hefty bills on labor unions that have negotiated generous pension plans, he said the state auditor’s dashboard legitimately points out danger signals.

“It is what it is and you can’t get out from under it, but it’s not a bleak financial future as long as Richmond has the revenue to pay these pension obligations,” Butt said. “So far, we’ve done it.”

Oakland

Similar to Richmond, Oakland also has a special tax to help pay pension liabilities. Yet, all of the city’s high-risk scores also revolve around being able to pay out those employee benefits.

Oakland ranks the 24th worst in the state for its more than $2 billion in pension obligations, which represent 140% of the $1.48 billion the city collected as revenue last fiscal year.

Last year’s $222 million contribution to CalPERS accounted for 15% of the city’s general fund revenue – a stat that ranks 11th worst in the state. By 2029, the payments are projected to be closer to 18%.

“These are universal problems, so to some extent, it does not surprise me, it does not alarm me,” Erin Roseman, Oakland’s director of finance, said. “It’s a problem that you can’t solve overnight, but it’s a long-term fix and we’re on our way there.”

Looking ahead, she said employees hired after 2013 will have a smaller financial impact on cities when they retire – thanks to state reforms of the generous packages offered in the past.

El Cerrito

Herculean efforts to cut city spending, a corrective action plan from the state auditor’s office and an injection of federal COVID funding helped build El Cerrito’s unrestricted general fund reserves from a negative $1.7 million to more than $7 million.

While this is the first year the city of just 26,000 residents has moved from “high-risk” to “moderate” since the dashboard launched, officials still face an uphill battle to fully fund employee benefits.

For fiscal year 2020-21, the city’s $70 million pension liability accounted for 123% of the city’s $57 million in revenues.

The city’s current obligations are more than all of the revenue flowing into its coffers, and city officials have only saved enough money to fund 78% of the $224 million in pension liabilities they must pay out. That is the 39th worst statewide.

Additionally, looking at pension costs, the city’s annual contribution to CalPERS – $7.7 million last fiscal year – accounts for 13% of all revenue streams, earning it the 21st worst percentage statewide.

Hoping to maintain momentum after avoiding insolvency and filing for bankruptcy, City Manager Karen Pinkos said officials are planning to set up a trust that would set aside money specifically earmarked for pension costs.

Click here to read the full article in the Mercury News

Voters Finally Starting to Grasp the Debt Crisis

December 1, 2015 By Jon Coupal 8 Comments

The former head of the United States Government Accountability Office has estimated that the national debt is a staggering three times as much as usually publicized. Rather than $18 trillion, the actual number is around $66 trillion.

News reports about government debt at all levels are now more frequent and increasingly alarming. There is little doubt that this is due to the fact that the debt crisis is actually getting worse.

But it might also be a reflection of a greater awareness on the part of citizens and the news media that debt is a real danger. For those of us who have been warning about government debt for decades, this greater awareness is long overdue.

Understanding all the ramifications of public debt isn’t easy. As to the magnitude of debt, former California legislator and now congressman Tom McClintock used to refer to “MEGO” numbers (My Eyes Glaze Over) meaning that citizens really can’t be expected to comprehend the vastness of numbers – like $66 trillion – with so many zeros behind them.

And it isn’t just the amount of debt that is confusing. In addition to voter approved bonds, normally referred to as “general obligation” bonds, there are a myriad of debt instruments pushed by powerful special interests including revenue bonds, “certificates of participation” and a host of other esoteric instruments created for the purpose of avoiding voter approval.

Other government debt isn’t even reflected by bonds or other instruments. The hundreds of billions of dollars of unfunded pension obligations in California are most certainly debt that ultimately will have to be repaid by taxpayers. And as columnist Dan Walters with the Sacramento Bee just noted, California had to borrow $10 billion from the federal government for the state’s Unemployment Insurance Fund which remains insolvent even though we are told by the political elites that California is in the midst of a vibrant economic recovery.

So why is it, given the complexity of issues related to government debt, that the public is starting to pay attention? First, high profile municipal bankruptcies in Vallejo, Stockton and other cities have wreaked havoc on both taxpayers’ wallets and on public services. There is widespread belief that even Los Angeles itself will be unable to avoid bankruptcy. Second, both the media and taxpayer advocacy groups like Howard Jarvis Taxpayers Association have successfully used the Public Record Act to secure far more detailed information than has been available in the past about employee pay and benefits, including lavish pension benefits. The disclosure of this information has spurred voters to start wondering why our services are second rate while public employee compensation is so high. Third, both private organizations and public entities have vastly improved data bases easily accessible on the internet making these complex issues a little easier to understand. For example, Controller John Chiang has just created a new website called Debt Watch to provide voters with more information about the various bond issuances.

But perhaps the biggest factor in the renewed attention of citizens on debt is personal experience. The 2008 recession left millions with underwater mortgages. Nothing focuses attention like a crisis that hits someone right between the eyes. Government debt in the trillions of dollars is difficult to understand. Not being able to pay one’s mortgage is a lot easier to grasp.

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

Filed Under: Top Stories Tagged With: Bankruptcy, Debt, HJTA, Howard Jarvis, Jon Coupal, National Debt, Tom McClintock

L.A. Unified In Danger of Bankruptcy

November 9, 2015 By Joel Fox 3 Comments

Here’s an old tune you’ve heard before: The Los Angeles Unified School District could face bankruptcy with one of the chief contributing factors being high pensions and health care costs for retired employees.

The L.A. School Board will discuss a new report raising that ominous red flag this week.

Pensions are not the only issue driving the school district toward insolvency. The report cited declining enrollment as a factor driving down revenue. Enrollment is falling due not only to fewer potential school age children but the fact that many students have decamped to independently operated charter schools.

Still, the pension issue is cited as part of the problem as it has been with so many financially struggling government agencies.

One year ago this week, the University of California announced it would have to seek a series of tuition increases. At the time, the UC Chief Financial Officer cited retirement costs in explaining the need for tuition increases. He said tuition hikes could be avoided if the state helped with retirement costs.

City bankruptcies or near bankruptcies in California also highlighted the pension burden. Stockton, for example, was spending $13 million in pensions at the turn of this century, a decade later the cost was $30 million and was predicted to double again in only a few years.

The possibility of the state’s largest school district facing bankruptcy will play into the push to extend the Proposition 30 tax increases beyond the date the so-called temporary taxes were to end. Voters won’t hear much from supporters of the tax extension about funding pensions – the campaign rhetoric will be about the students – but pensions are a major factor for those supporting the extension.

Last January, the Manhattan Institute’s Steve Malanga wrote in a Wall Street Journal op-ed that a good portion of the original Prop. 30 tax increase was dedicated to pensions. (Disclosure: I was quoted in the article.) He wrote that the problem of school pension costs would continue and an effort would be made to continue the Prop. 30 tax increase to cover those costs.

Now it is almost certain a form of the Prop 30 extension will be on the November 2016 ballot just as he predicted. Malanga concluded his piece: “It’s a reminder that in some places the long struggle to pay off massive government pension debt is just starting.”

It is not starting but continuing in the Golden State.

Originally published by Fox and Hounds Daily

Filed Under: Top Stories Tagged With: Bankruptcy, education, Joel Fox, LAUSD, Los Angeles, Los Angeles Unified School District, pensions, Prop. 30

San Bernardino exit plan cuts some pension costs

May 27, 2015 By Ed Mendel 1 Comment

A San Bernardino plan to exit bankruptcy follows the path of the Vallejo and Stockton exit plans, cutting bond debt and retiree health care but not pensions. Then it veers off in a new direction: contracting for fire, waste management and other services.

The contract services are expected to reduce city pension costs. Other pension savings come from a sharp increase in employee payments toward pensions and from a payment of only 1 percent on a $50 million bond issued in 2005 to cover pensions costs.

Last week, a member of the city council had a question as a long-delayed “plan of adjustment” to exit the bankruptcy, declared in August 2012, was approved on a 6-to-1 vote, meeting a May 30 deadline imposed by a federal judge.

“The justification from what I’m understanding from the plan — the justification for contracting is more or less to save the city from the pension obligation. Is that correct?” said Councilman Henry Nickel.

One of the slides outlining the summary of the recovery plan said: “CalPERS costs continue to escalate, making in-house service provision for certain functions unsustainable.”

The city manager, Allen Parker, told Nickel “that’s part of it” but not the “entirety.”

In addition to pension savings, he said, contracting with a private firm for refuse collection now handled through a special fund is expected to yield a “$5 million payment up front” into the deficit-ridden city general fund.

Parker said the California Public Employees Retirement System safety rate for firefighters is between 45 and 55 percent of base pay. “So if you have a fireman making say $100,000 a year, there is another $50,000 a year that goes to CalPERS,” he said.

An actuary estimated that contracting for fire services could save the city $2 million a year in pension costs, Parker said. The city expects total savings of $7 million or more a year, similar to a Santa Ana contract with the Orange County Fire Authority.

Unlike other unions, firefighters have not voluntarily agreed to help the struggling city by taking a 10 percent pay cut and foregoing merit increases. The cost of firefighter overtime has averaged $6.5 million in recent years.

After the court allowed the city to overturn a firefighter contract requiring “constant manning” last year, the city expected reduced staffing during off-hours. But overtime has not decreased, wiping out anticipated savings of $2.5 million this year.

Negotiations with the firefighters are difficult, Parker said, and their union has filed several lawsuits. He said the situation is “out of hand” and “can’t be contained,” part of the reason for the plan to contract for fire services.

The city expects fire service bids from San Bernardino County and others. A private firm, Centerra, has shown interest. Councilman Nickel said a legislator called about contracting with a private firm, suggesting “concern at the state level.”

Parker said a contract with a private firm would need a mutual aid agreement with neighboring government fire services. He said a San Manuel private fire service has been accepted by a fire chiefs association that manages the regional agreements.

Contracting for police services is not planned. Parker said the “one possible agency,” the San Bernardino County Sheriff‘s Department, made a $60 million proposal in 2012, reaffirmed last year, that would not yield city savings.

Fire and waste management are the biggest opportunities for savings and revenue among 15 options for contracting city services listed in the recovery plan summary. City employees are expected to be rehired by contractors.

Estimated annual savings are listed for contracting five other services: business licenses $650,000 to $900,000, fleet maintenance $400,000, soccer complex management $240,000 to $320,000, custodial $150,000, and graffiti abatement $132,600.

In the 1960s, San Bernardino was the “epitome of middle-class living,” said the plan summary, and then a “profound and continuous decline” turned it into the poorest California city of its size (214,000).

Median San Bernardino household income was at the California average in 1969, an inflation-adjusted $54,999, before steadily falling by 2013 to $38,385, well below the state average of $61,094.

Financial trouble began before the recession. A unique form of government created “crippling ambiguities” of authority among the city manager, mayor, council and elected city attorney, leaving no one clearly in charge as the city slowly sank.

When the reckoning finally came in 2012, San Bernardino faced an $18 million cash shortfall and an inability to make payroll. After an emergency bankruptcy filing, the city became the first to skip its annual payments to CalPERS.

Now the skipped payment of $14.5 million is being repaid over two fiscal years with equal installments of about $7.2 million. The recovery plan also said with no elaboration: “FY 2019-20: $400,000 annually in penalties and interest.”

Replying to Nickel last week, the city manager explained why, if most employees are to be replaced by contract services, the plan does not propose to cut CalPERS debt. The city’s pensions have an “unfunded liability” of $285 million and are 74 percent funded.

Parker said the plan protects pension amounts already earned by city employees, even with a new employer, and like the Stockton and Vallejo plans reflects the view that pensions are needed to compete with other government employers in the job market.

“We naively thought we could negotiate more successfully, but that didn’t necessarily happen,” Parker said of mediation with CalPERS. An early plan called for a “fresh start” stretching out pension payments, yielding small savings in the first years.

And like Vallejo but not Stockton, which said from the outset it did not want to cut pensions, Parker said there was fear of a costly and lengthy legal battle with deep-pocketed CalPERS, possibly all the way to the U.S. Supreme Court.

One of the unique provisions in the San Bernardino city charter, which voters declined to overturn last year, bases police and firefighter pay on the average safety pay in 10 other cities, not labor bargaining.

Despite that link, police and firefighter compensation is said to be 8 to 10 percent below market because of low benefits. The bankrupt city stopped paying the employee CalPERS share and raised police and firefighters rates to 14 percent of pay.

Higher pension contributions from employees saved the city about $8 million last fiscal year, the plan said. Retiree health payments were reduced from a maximum of $450 per month to $112 per month, saving $213,750 last year.

“The filing of the plan is only the beginning of a long and very difficult process regarding confirmation and continued litigation with some of our creditors,” the city attorney, Gary Saenz, told the city council last week.

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.

Filed Under: Top Stories Tagged With: Bankruptcy, CalPERS, pensions, San Bernardino, unions

Stockton and Detroit Exit Bankruptcy Leaving Pension Systems As-Is

December 17, 2014 By Lance Christensen and Victor Nava 2 Comments

The landscape for public employee pensions shifted in 2014 as federal judges gave credence to the idea that pension benefits may be cut in bankruptcy. This challenges the long held idea that pension benefits are impervious to cuts and most observers are wondering just how significant this shift will be going forward.

This fall, city leaders watched as federal judges approved debt-cutting bankruptcy plans in Stockton and Detroit, ending two of the largest municipal bankruptcy cases in U.S. history. Many speculated both cities could do more to ease their fiscal problems by making significant cuts and structural changes to public pensions. However, both judges demurred and moved forward with plans that eased a portion of the cities’ financial obligations, but largely protected pensions. The failure to significantly address public pension debt and make structural changes to the pension systems in both Stockton and Detroit does not bode well for the economic future of either city post-bankruptcy. It also presents an interesting conundrum for other cities in dire fiscal distress that bear significant pension costs and unfunded liabilities. Are more cities to follow the path to pension cuts in bankruptcy?

In Detroit, the nation’s largest municipal bankruptcy case ended on November 7, fifteen months after it began. The restructuring plan approved by Judge Steven Rhodes slashed $7 billion in debts with bondholders receiving between 14 and 74 cents on the dollar back from the city. Public pensioners did not see cuts as deep, thanks in part to the likes of Van Gogh and Renoir. Detroit’s so-called “grand bargain” transferred ownership of part of the Detroit Institute of Arts collection from the city to the nonprofit running the museum for $816 million. The money, to be paid out over 20 years, comes from state taxpayers and privately-donated funds raised to offset deeper pension cuts. Pensioners in Detroit’s general retirement system are taking a 4.5 percent cut to their monthly pension check, will no longer receive cost-of-living adjustments, and will see a reduction in medical benefits. Some members who received excess annuity payments from the city will also be required to pay them back. Police and firefighter pensioners will only see a reduction in cost-of-living adjustments from 2.25 percent to 1 percent annually.

The pension cuts, which have been called “modest” by both the Wall Street Journal and NPR are exactly that. Detroit’s unfunded pension benefits are still a risk to the city’s fiscal health. And the system still relies on unrealistic rates of return when calculating required pension system contributions—the General Retirement System assumes a 7.9 percent annual return and the Police and Fire Retirement System assumes 8.0 percent, even though the city has only been earning an average of 5.89 percent for the general system and 5.5 percent for the police and fire system over the last 10 years, from 2004 to 2013.

In Stockton, even less was done to address the city’s pension problems despite a golden opportunity to make significant reforms. On October 1, Judge Christopher Klein ruled that the city could reduce its payments to CalPERS and exit its contract with the pension administrator if the city wanted. It was in his purview to cut the pensions if he saw that as the city’s best course of action. But the city chose not to modify its pension benefits or leave CalPERS. On October 30, the fourth largest U.S. municipal bankruptcy case was settled when Judge Klein approved Stockton’s bankruptcy plan, leaving existing pension benefits intact. The city agreed to pay most bond creditors between 50 to 100 cents on the dollar. Investment firm and Stockton creditor Franklin Templeton received only $4.3 million back from a $36 million loan (or 12 cents on the dollar).

Judge Klein noted the reason he left public pensions untouched was because public workers had already suffered other cutbacks, including having their salaries and healthcare benefits reduced, and because redoing current employee pensions would not be a simple task. Franklin Templeton disagrees and is appealing the judge-approved plan at the Ninth Circuit Court for further remedies.

The so-called “California Rule,” which means pension benefits cannot be reduced for current employees, was once thought to be ironclad, but Judge Klein’s ruling opens up the possibility for a future bankrupt California city to challenge it by choosing to cut pensions or leave CalPERS entirely if the city ends up in bankruptcy. Some thought that San Bernardino, another city battling with CalPERS, may take this route. Yet after Klein’s October 31 ruling on Stockton, San Bernardino decided to pay full fare despite the fact that they had previously tried to reduce their payments to CalPERS. Like San Bernardino, Stockton missed an opportunity to shrink its $29 million annual pension costs that have led to both reduced services for the citizens of Stockton and a new sales tax.

Granted, though there are not a lot of cities currently positioned to challenge the California Rule, Moody’s Investors Services points out that Judge Klein’s October 1 ruling allowing cities to cut pensions may give cities more negotiating power with public sector unions. In reality, reducing pension benefits is likely only an option for larger cities where pension obligations and general fund costs make it reasonable to wager tens of millions of dollars on the litigious process so that they can reduce their pension liabilities in the hundreds of millions or billions of dollars. Los Angeles and Chicago, anyone?

Both Stockton and Detroit are still saddled with billions in unfunded pension debt even after exiting bankruptcy. The bankruptcy plans that both cities presented and got approved did nothing to even chip away at existing pension debt. It is unlikely that either city will be able to contain the pension debt that devours their budgets unless structural changes are made to the current defined benefit pension systems they have in place. Other formerly bankrupt cities, like Vallejo, California, have struggled post-bankruptcy because of pension debt and the same type of budgetary problems affecting Stockton and Detroit.

This is only the first couple of rounds of a long bout, as we learned from the lengthy reform processes in San Diego and San Jose. Pension systems like CalPERS have deep pockets and one can sympathize with the city manager or attorney who decides not to go for the option of challenging the increasing costs of pensioners even though legal precedence is tilting in their favor. No doubt, without substantive reform that provides for an affordable and secure retirement system for both the retirees and taxpayers, that pays down the debts sooner rather than later and requires that these jurisdictions pay their full pension costs, Detroit and Stockton will likely be back before a judge begging for more protection. Just ask Vallejo.

Lance Christensen is Director of the Pension Reform Project at the Reason Foundation, and Victor Nava is a Policy Analyst at the Reason Foundation.

Filed Under: Top Stories Tagged With: Bankruptcy, Detroit, Municipal Bankruptcy, pensions, Stockton, unions

Stockton Bankruptcy Ruling Backs Away from Pension Reform

November 3, 2014 By Heidi Siegmund Cuda 8 Comments

Jack Dean likes to tell the story of Prichard, Alabama, a city that declared bankruptcy not once, but twice.

“They were warned that the pension fund was running dry, and in 2009, it ran dry,” says Dean. “So they stopped mailing the checks.”

Dean, the editor and founder of PensionTsunami.com, tells the cautionary tale of Prichard in response to Thursday’s federal ruling that gave the California city of Stockton the green light to exit bankruptcy by paying bond investors chump change while protecting public pensions.

“Once again, Calpers has managed to intimidate a city government into not dealing with the pension issue,” says Dean. “So we’ll continue to careen down the pension crisis path, because they’re not paying attention to the elephant in the corner.”

While Stockton pensioners breathed a sigh of relief, an executive at Calpers, the nation’s largest pension fund, called U.S. Bankruptcy Judge Christopher Klein’s ruling “smart.”

“The city has made a smart decision to protect pensions and find a reasonable path forward to a more fiscally sustainable future,” Calpers Chief Executive Officer Anne Stausboll said in a statement. “We will continue to champion the integrity and soundness of public pensions.”

Earlier this month, Judge Klein issued the explosive decision that pensions can be reduced in bankruptcy, but on Thursday, he accepted the city council’s plan for Stockton, suggesting the workers had suffered enough.

“What it means is when you go into bankruptcy, pensions are not protected,” says San Jose Mayor Chuck Reed, who’s leading California’s pension reform movement. “But in this case, Judge Klein looked at the whole package, and decided that employees gave up their health care for pennies on the dollar… So you don’t necessarily have to cut pensions, you don’t necessarily have to cut health care, you don’t necessarily have to cut salary, but you have to do something to deal with the problem. Employees have to share the pain.

“The takeaway for California is it would be a whole lot better if we could deal with these problems outside of bankruptcy and before bankruptcy.”

Reed says local governments should be empowered to negotiate changes in future benefits as a means of controlling the costs in order to avoid the pain of bankruptcy.

“It’s certainly a knockdown, drag out fight in San Jose,” says Reed, who is calling for the U.S. Justice Department to investigate San Jose’s police union for corruption. “The good news is, we’re saving 25 million dollars a year due to our pension reforms and we’re putting that back into city services.”

In court on Thursday, Judge Klein suggested that Stockton’s plan was the best it could do and that bankruptcy was a dauntingly expensive proposition.

But attorney Robert Flanders, the municipal fix-it guy in Rhode Island, says when push comes to shove, don’t be afraid of the “B” word.

Flanders, a partner in the law firm Hinckley-Allen, was the state-appointed receiver in Central Falls, Rhode Island, which went through a bankruptcy restructuring in 2011 and came out the other side.

“It was plain that we were running out of cash to pay people,” says Flanders. “That’s when I had to go in front of them and say, ‘I’m sad to say this, but there’s a risk that you’re not going to get paid at all and we’re going to default. A haircut still looks a lot better than a beheading.’ It really was the true situation.”

Thirteen months later, the city was back in business and ultimately retirees ended up with a 25 percent haircut, down from a high of 55 percent.

“We took the opportunity of the bankruptcy to not only restructure the pension system, but get rid of the gamesmanship and make it much more favorable to the taxpayers,” says Flanders. “It can be done, and it can be done quickly. The beauty of it from a legal standpoint is all the arguments about breach of contract amount to a hill of beans in a bankruptcy proceeding because the only issue is what can a city afford.”

He says Judge Klein is giving Stockton the benefit of the doubt. But Stephanie Gomes, the former vice mayor of Vallejo, says Stockton missed the opportunity to learn from Vallejo’s mistake. Vallejo was the first California city to topple.

“If I were on the Stockton city council, I would’ve pushed for some sort of pension reform,” says Gomes, who was on the Vallejo city council before, during and after the city declared bankruptcy. “We didn’t have a majority willing to do that, and because of that, we are still saddled with crushing pension debt in Vallejo, and we’re still struggling with our exit plan.”

In effect, she says, Vallejo failed bankruptcy.

“I call Calpers ‘Hotel California,’” says Gomes. “Once you’re in, you can never leave. Until there’s statewide reform, there’s not much cities can do.”

For John Moore, a candidate for mayor in the seaside town of Pacific Grove, California, Thursday’s ruling was a bummer.

“Judge Klein led us on for about a year,” says Moore, a retired attorney whose run for mayor is an attempt to tackle Pacific Grove’s pension debt. “We thought something really big was going to happen, and now we have a plan that has no chance of working.”

Dean says nothing changes the fact that Stockton’s pension fund is millions in the hole.

“When the checks stop coming in the mail, maybe we’ll get reform.”

This piece was originally published on Fox and Hounds Daily

Filed Under: Top Stories Tagged With: Bankruptcy, CalPERS, pensions, Stockton

Have Stockton officials learned their fiscal lesson?

October 11, 2014 By CPR Editors 3 Comments

The Bureau of Labor Statistics, which tracks monthly unemployment in 372 metropolitan areas, reported that Stockton, California had the nation’s eighth-highest jobless rate at the end of August. More than 10 percent of those looking for work in the struggling Central Valley city couldn’t find it. This is nothing new. Stockton has been coping with unemployment rates 50 percent to 75 percent above the national average for more than a decade. Based on that long history of joblessness, you’d think that qualified local residents would be ready to snap up government jobs with starting salaries of $60,000, plus health benefits, a pension, and yearly pay increases. Apparently not: according to the city’s elected officials, if Stockton is forced to reduce its generous and costly retirement plan as part of its exit from bankruptcy, the city will see a “mass exodus” of workers and won’t be able to fill crucial positions in its police and fire departments.

Bankruptcy judge Christopher Klein ruled last week that the unusual legal protections enjoyed by California pensions, which make it virtually impossible to cut the costs of a pension plan in the Golden State, did not apply in bankruptcy court. Stockton city officials and lawyers were livid. They had planned a reorganization sharply cutting what some creditors receive while leaving the city’s gigantic annual pension bill untouched. One city creditor, Franklin Templeton Investments, which would receive as little as one penny on the dollar for its unsecured claims, has objected, arguing that it’s not fair that Stockton could ignore its huge retirement debt. Judge Klein essentially agreed, saying that there’s no reason the city couldn’t hack away at it, or even dump its expensive plan with the California Public Employees’ Retirement System and seek a cheaper alternative. “There are lots of permutations and combinations out there,” said Klein, explaining the various ways Stockton might save money by replacing its expensive pensions with something more affordable.

Stockton officials’ claims that they would face a personnel crisis if they cut pensions strain credulity. Salaries and benefits in California’s public sector are so generous that, even after bankruptcy, a government job should appeal to many Stockton residents. Based on a deal negotiated between the city and its police union after Stockton entered bankruptcy, the starting salary for a police officer is $4,970.39 per month, or $59,644 annually. That rises to $72,888 after five years. Firefighters start at $49,000 annually, a salary that rises to $60,000 in five years. The city’s median annual household income is less than $36,000. Stockton will also spendabout $14,000 a year toward a family health-insurance plan for a new officer or firefighter. New officers enter a pension plan under which they can retire at 57, with 2.7 percent of final salary for every year served. So an officer with 30 years of service and a final salary of $75,000 would qualify for a pension of nearly $61,000.

Public service is apparently so tough in Stockton, however, that the city claims it must compete aggressively for a limited pool of new workers. Stockton’s former city manager justified not asking for significant changes to pensions because “we cannot just pluck people from the unemployment lines—the requirements to be a police officer are demanding and 99 percent of applicants do not qualify or, if hired, wash out.” Some elite military units have lower washout rates.

Government-worker unions exploit this kind of thinking to demand higher wages and benefits, especially when neighboring municipalities boost their compensation. That creates an ever-upward spiral of wages as school districts, towns, and cities adopt the new wage levels, regardless of whether they can afford them. Stockton officials admit that their current woes are a product of this mindset. In 2012, the former city manager pointed out that for years, Stockton officials added benefits in line with those offered by other cities. “Nobody gave a thought to how it was eventually going to be paid for,” he said.

Stockton risks coming out of bankruptcy with a heavy compensation burden. Officials argue that city workers have sacrificed enough, largely because the city eliminated its program of providing free health-care coverage for all retirees. But that extremely expensive perk is rare in the private sector and disappearing in government. Meanwhile, however, pension contributions for public-safety workers now amount to 41 percent of payroll. That would put the total cost of salary, health benefits, and pensions at about $120,000 annually for a fifth-year officer. The good news, if you can call it that, is that the city projects that after several more pension increases in coming years, Stockton’s soaring retirement costs will “level off.” The bad news is that pension contributions already amount to $42 million annually in a city with a general-fund budget of just $185 million.

Stockton is heading down a path previously traveled by Vallejo, the Bay-area city that emerged from a three-year bankruptcy in late 2011 without cutting its pension debt. Vallejo tried to compensate for its still-high retirement costs with cuts elsewhere but is now struggling financially thanks to its soaring pension costs, including annual pension contributions for police officers that average about $50,000 per cop.

The long saga of Stockton’s decline dramatizes the inefficiency and illogic of union-dominated, monopolistic, government-labor markets. California laws and court rulings provided Stockton workers with extraordinary protections for some benefits, including one of the nation’s most generous pension plans. When Stockton couldn’t cut its labor costs fast enough, it engaged in destructive rounds of layoffs because, ironically, the one thing you can do when all else fails is fire people. City residents and laid-off city workers were the losers.

Now Stockton has a chance to reach more solid financial footing thanks to Judge Klein’s ruling and a painful two-year sojourn through bankruptcy. But it’s not clear that city officials have learned their fiscal lessons.

This article was originally published by City Journal.

Steven Malanga is the senior editor of City Journal and a senior fellow at the Manhattan Institute. His latest book is Shakedown: The Continuing Conspiracy Against the American Taxpayer.

Filed Under: Top Stories Tagged With: Bankruptcy, pensions, Stockton

A New Chapter For California: Chapter 11

August 10, 2011 By Michael Levin Leave a Comment

As a state, we take in about $70 billion a year. That looks like big number, except for one problem. We spend about $90 billion a year. You don’t have to star in Good Will Hunting to figure out that there’s a hole in that math and some blame to be placed.

Actually, there’s tons of blame to shovel around. You can go back to Gray Davis, who somehow thought that the rising tide of tax receipts from the Internet boom would last forever. Actually, he wasn’t alone–pretty much everybody felt that way, but pretty much everybody wasn’t Governor. With all that money flowing in, he was a laydown for the state unions that demanded and received all manner of salary increases, retirement goodies, and other means of reward not tied in any way to performance.

Once that particular beanstalk crashed to earth, California was stuck with enormous transfers to its unionized workers that it could no longer afford. But it had to pay them anyway.

Schwarzenegger followed, and we as a state are waking up from that political equivalent of a one-night stand with the same question on Schwarzenegger’s housekeeper’s mind–What were we thinking? Or were we just blinded by his muscular good looks? He’s free, and we’re stuck with his love child, a $20 billion deficit.

Schwarzenegger’s next movie shouldn’t be a Terminator film. It ought to be a remake of Gulliver’s Travels, re-christened Governor’s Travels, or Governor’s Travails. Here’s the plot: Ahh-nold is tied down to a bed of concrete cigar boxes by a bunch of girly men playing the part of Lilliputians playing the part of members of the State Assembly and Senate. The only person who got more money out of Schwarzenegger than the unions will be Maria.

Then you’ve got the left, which has somehow made a moral issue out of violating borders and demanding handouts. Frankly, as a businessman, I’m astonished I have time to write this column. I’m so busy supporting not just my family but sixteen union workers and approximately forty-three undocumented individuals who are attending California schools and universities, benefiting from California hospitals, and otherwise enjoying the crumbling infrastructure of California, all on my dime.

I actually agree with one liberal shibboleth–people aren’t illegal. Illegal acts, however, are illegal. Breaking the law is illegal. If the numbers were reversed–if California took in $90 billion in taxes and only spent $70 billion–I might feel a little more charitable. As it is, I’m feeling a little pinched.

That’s why I say it’s time for California to declare bankruptcy. A clean slate. A fresh start. Just like you see on those late night infomercials. California ought to go to one of those bankruptcy guys you see advertised on the backs of buses and declare itself bankrupt, for the low, low fee of $249.00, plus filing fees. If we did that, what would we get?

We’d get a chance to start over. We’d get a chance to rewrite all the agreements with the unions, and maybe we’d have enough money left over to buy back some of the legislators whom the unions currently own.

We’d be able to reallocate spending in this state, so that there’s more of a connection between who earns money and whose kids get educated.

We would no longer be tied to the craven, secret giveaways that governor after governor has offered to special interests in exchange for campaign contributions, cigars, hookers, junkets, or whatever the currency of Sacramento really is.

With that kind of clean slate, we’d be able to pay people what they are worth, instead of what their union leaders have been able to carve out for them over decades of wheeling and dealing.

We’d be able to pay our prison guards what they would make in other states, which would allow us to build more prisons and arrest more bad guys to fill those prisons. We might even have enough left over to hire some more prison guards.

As a result, the state and municipalities might not be so broke that they have to spend all their time nickel and diming businesses to wring out every ounce of tax revenue to pay for the bloated expenditures that are destroying our state.

There might even be enough money left over to re-open the courtrooms, libraries, and emergency rooms that have been shuttered by our endless financial emergency.

Would it be a black eye for California if we went bankrupt? Yes, but compared to what? The knuckleheads in Washington, who nearly took down the world economy and may have torched America’s fragile economic recovery in the name of scoring a few points during the debt ceiling fiasco? Compared to Portugal, Italy, Ireland, Greece, and Spain–five European nations who make Arnold Schwarzenegger and Jerry Brown look like Thomas Jefferson and Alexander Hamilton?

Although, come to think of it, Thomas Jefferson died broke, so maybe that’s not the best analogy.

You get what I’m saying. As one economist put it, “Things that can’t go on, stop.” It’s time we put a stop to the idiotic, seemingly unstoppable spending that is bankrupting the state, driving businesses to Texas or other healthier, more business-friendly locales, and get things headed in the right direction.

Going bankrupt, for California, would hardly be a badge of shame compared to what’s been going on in Sacramento for decades. It would be a situation where the state finally told the truth.

Michael Levin is a New York Times bestselling author and runs BusinessGhost.com, America’s leading provider of ghostwritten business books.

Filed Under: Top Stories Tagged With: Bankruptcy, California, governor, state budget