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

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San Bernardino Plans to Cut Pensions of Retired Police Officers

December 29, 2015 By Ed Mendel Leave a Comment

police-badgeSan 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, Senate Bill 400 in 1999.

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.

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.

SBchart

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.

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.

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.

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. Posted 28 Dec 15

This piece was originally published by CalPensions.com

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San Bernardino’s bankruptcy plan favors CalPERS

May 19, 2015 By Paloma Esquivel and Joe Mozingo 1 Comment

As reported by the L.A. Times:

San Bernardino’s plan to exit bankruptcy has at least one winner, plenty of losers and could have repercussions for other California cities.

The city will pay every penny of the almost $50 million it owes to the California Public Employee Retirement System, known as CalPERS, if a federal judge approves the plan.

But it will only pay one penny for every dollar it owes to some bondholders who helped the city pay its CalPERS bill over the years.

Retirees will lose healthcare benefits that they were promised. …

Click here to read the full article

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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.

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