Pension Reform

By Ed Mendel
Monday, December 1, 2014

What happens when a bankrupt city does not cut its largest debt, pensions, is getting its first test in Vallejo, which has higher average pensions and higher CalPERS rates than the two larger cities still in bankruptcy, Stockton and San Bernardino.

Vallejo was the forerunner, choosing not to try to cut pensions before exiting a 3 ½-year bankruptcy three years ago. City council members said later CalPERS had threatened a long and costly legal battle.

Stockton’s plan to exit bankruptcy without cutting pensions was approved in October. The judge ruled that CalPERS pensions can be cut in bankruptcy. But Stockton does not want to cut pensions, saying they are needed to be competitive in the job market.

San Bernardino, cash short, skipped payments to CalPERS for most of a fiscal year. Last month the city formally announced that under an agreement with CalPERS last June, the missed payments are being repaid and pensions will not be cut in bankruptcy.

So, will the bankrupt cities regret passing up a chance to cut growing pension costs that take funds needed for other services?

A leader among the critics of public pension cost reporting, credit-rater Moody’s, warned in February that the failure of the three bankrupt California cities to cut pensions risks a return to insolvency.

Vallejo may be a good post-bankruptcy test not only because it was first in and first out, but also because of its high pension costs. Here are some comparisons of the three cities from several sources.

Retirees of Vallejo, population 117,000, have higher average pensions than the retirees of the two larger cities, San Bernardino 214,000 and Stockton 300,000. One reason: Union bargaining was based on pay in the high-cost San Francisco Bay Area.

The latest CalPERS valuation reports show police and firefighters retired less than five years have an average pension of $95,127 in Vallejo, compared to $85,501 in Stockton and $78,673 in San Bernardino.

The average pension and benefit amount for retirees with 30 plus years of service in Vallejo is $83,938 in Vallejo, $66,286 in Stockton and $63,418 in San Bernardino, according to a database of government pay and pensions,

Of the individual pensions listed by name in the database, 13 percent (87) of Vallejo retirees have an annual pension of $100,000 or more, compared to 7.4 percent (130) of Stockton retirees and 5.9 percent (83) of San Bernardino retirees.

The rate that Vallejo pays CalPERS is significantly higher than the rates paid by the other two bankrupt cities. The Vallejo safety rate (police and firefighter), 57.6 percent of pay next fiscal year, is projected by CalPERS to reach 72 percent of pay in 2021.

Last week a Moody’s report said the San Bernardino no-cut pact with the California Public Employees Retirement System makes it more likely that the city will cut bond debt and retiree health care, following the Vallejo and Stockton pattern.

“San Bernardino’s choice to leave its accrued pension liabilities unimpaired means that its contribution requirements to CalPERS (see Exhibit 2) will likely increase to the point where they weaken the city’s financial profile, even after the relief provided by the bankruptcy adjustment,” said Moody’s. “This weakening is similar to what we expect to occur in both Stockton and Vallejo.”

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