October 7, 2013

Dan Walters: California’s cities face pension woes

Bob Deis, the city manager of insolvent Stockton, is proud of fashioning a bankruptcy plan that avoids cuts in city workers’ pensions.

Bob Deis, the city manager of insolvent Stockton, is proud of fashioning a bankruptcy plan that avoids cuts in city workers’ pensions.

Insurers of the city’s bonds had demanded that pensions be on the table but appear to have backed off and accepted a multipart deal that includes stretching out some payments and taking over a building that would have become Stockton’s City Hall.

Were pensions to be reduced, Deis says, “There’ll be a mass exodus of those employees, and we won’t be able to fill those positions.”

Assuming the deal wins bankruptcy court approval, and voters approve a sales-tax hike later this year, Stockton evidently will not be the arena for a showdown on whether public pension obligations can be reduced in bankruptcy.

That issue, however, is still alive in San Bernardino’s bankruptcy, and it’s a pivotal point in Detroit’s bankruptcy.

Regardless of what happens in bankruptcy court, California’s local governments, especially cities, are facing years, or even decades, of fiscal distress from rapidly rising pension costs.

Sharp increases in local pension benefits over the last 14 years, coupled with lackluster earnings by CalPERS and other pension trust funds, and a tide of baby-boomer retirements are pushing costs upward.

CalPERS is adopting a more conservative investment strategy after two decades of counting on speculative ventures, and has already told its member agencies to expect steady increases in their mandatory contributions to whittle down its immense unfunded liabilities.

The situation is illustrated by what’s happening in Vallejo, which, like Stockton, left pensions untouched when it went through bankruptcy a few years back.

Like Stockton, it sought relief from its boldholders, slashed city workers and reduced their health benefits, but balked at pension cuts when CalPERS threatened a legal battle.

Less than two years after emerging from bankruptcy, Vallejo finds itself back in the soup, with a $5 million-plus deficit this year and a projected $8 million shortfall next year.

When Vallejo ended its sojourn through bankruptcy in 2011, it was paying CalPERS $11 million a year – about 14 percent of its budget – but it’s now $15 million, or 18 percent, and growing.

“Now we have to figure out a way to pay for these new CalPERS rates,” Vallejo’s finance director, Deborah Lauchner, told the Reuters financial news service. “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.”

While Deis may be proud of avoiding Stockton pension cuts, the underlying problem is still unresolved.

Voters may weigh in next year on a proposed state ballot measure that would allow local governments to cut future pension benefits they cannot afford.

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