OT: Untouchable Pensions May Be Tested in California

[blake]

Untouchable Pensions May Be Tested in California

Untouchable Pensions May Be Tested in California
By MARY WILLIAMS WALSH

When the city manager of troubled Stockton, Calif., had to tell city council members why it was on track to become the biggest American city yet to go bankrupt, it took hours to get through the list.

There was the free health care for retirees, the unpaid parking tickets, the revenue bonds without enough revenue to pay them. On it went, a grim drumbeat of practically every fiscal malady imaginable, except an obvious one: municipal pensions. Stockton is spending some $30 million a year to pay for them, but it has less than 70 cents set aside for every dollar of benefits its workers expect.

Some public pension experts think they know why pensions were not on the city manager’s list. They see the hidden hand of California’s giant state pension system, known as Calpers, which administers hundreds of billions of dollars in retirement obligations for municipalities across the state.

Calpers does not want cities like Stockton going back on their promises, and it argues that the state Constitution bars any reduction in pensions — and not just for people who have already retired. State law also forbids cuts in the pensions that today’s public workers expect to earn in the future, Calpers says, even in cases of severe fiscal distress. Workers at companies have no comparable protection.

Stockton is in the midst of a mediation process with its creditors that will determine by the end of June whether it will file for Chapter 9 bankruptcy, which would allow the city to negotiate reductions in its debt in court.

For Calpers, the prospect of a California city in Federal Bankruptcy Court portends a potential test of the constitutional mandate that federal law trumps state laws — in particular, the state laws that protect public workers’ pensions in California. Such a challenge could blow a hole in what experts consider the most airtight pension protections anywhere.

“Obviously, what Calpers wants is that it doesn’t come up in the process, which I think is ridiculous,” said David A. Skeel Jr., a law professor at the University of Pennsylvania who writes frequently on bankruptcy. “My view is that even the California Constitution is subsidiary to federal bankruptcy law.”

As the United States population ages and more and more public workers qualify for retirement, the cost of their pensions is growing fast, turning into a major drag on many local governments’ finances. The pension contributions that cities must make every year are rising, but their revenue, which often depends on property taxes, is not keeping up. Taxed-out residents, many of whom have lost their own pensions in the private sector, are unwilling to pay more. In tax-averse California in particular, where every tax increase must be put to a vote, officials are running out of options and some are considering bankruptcy.

Bankruptcy in America is a collective process, where creditors of a distressed company or municipality come together under court oversight and negotiate a plan to share the losses equitably, for the sake of the greater good. Some creditors may stand more toward the front of the line and others at the back, but there isn’t generally one big creditor that gets paid in full without having to get in line at all.

Yet that’s what Calpers appears to be doing.

“They will probably say it’s a statutory right and it can’t be changed by a bankruptcy court,” said James E. Spiotto, a Chapter 9 specialist with the firm of Chapman & Cutler. “I think it’s still subject to some question.”

A spokeswoman for Stockton’s city manager, Connie Cochran, said she could not discuss the city’s dealings with Calpers, citing the confidential mediation process.

When a company with a pension plan goes bankrupt in Chapter 11, it typically stops making most of its required pension contributions, just as it can stop paying many other bills. Some companies, like Northwest Airlines, even declare bankruptcy the day before a pension contribution is due, to save the cash.

Chapter 11 also permits companies to shed their pension obligations completely, if they can convince the bankruptcy judge that’s the only way they can restructure. The federal government, which insures traditional company pensions, then takes over the defunct plan and pays retirees their benefits, up to statutory limits.

There is no such backstop for state or municipal pensions. But cities, until recently, have managed to avoid bankruptcy, so there is almost no precedent for how public pensions will fare in Chapter 9.

Now that is starting to change.

Prichard, Ala., tried to file for Chapter 9 bankruptcy in 2009, after its pension fund ran out of money, but its case was thrown out by the judge, who cited a rule that Alabama cities must have bonds outstanding to qualify for Chapter 9. Prichard had no bonds at the time, just a big debt to its retirees. The city went for nearly two years without paying them their pensions, then reached an out-of-court settlement that gave them about one-third, on average, of what they had earned.

Central Falls, R.I., declared bankruptcy in 2011, after its pension fund for police officers and firefighters nearly ran out of money. The state withheld aid, and passed a law forbidding any effort to revive the pension plan by issuing bonds. Central Falls had little choice but to negotiate sharp cuts with the retirees.

In California, the only precedent is in the city of Vallejo, which declared bankruptcy in 2008. Unlike Prichard and Central Falls, which had their own pension plans, Vallejo is part of a state-run system. It kept making all of its contributions to Calpers throughout its three-year bankruptcy.

“We never shortchanged Calpers,” said Robert V. Stout, Vallejo’s finance director at the time.

Mr. Stout said he had expected to renegotiate the city’s retirement plans in bankruptcy, since everything else was on the table. At the time, Vallejo was in a fiscal tailspin with the mortgage debacle, which hit cities in California unusually hard.

But Calpers drew a line in the sand, warning Mr. Stout and his lawyers that in California, public pensions can be increased but never decreased, not just for retirees, but also for workers at midcareer.

What if the city is bankrupt and cannot afford it?

“They made it quite clear that they take that law very seriously,” Mr. Stout said. Calpers also warned that if the bankruptcy judge ruled that the state pension laws stopped at the federal courthouse door, Calpers would appeal, and make Vallejo pay its legal bills.

“We interpreted that as, ‘If we try, they’ll fight us through the courts forever,’ ” Mr. Stout said. He and Vallejo’s lawyers decided the city couldn’t afford it.

The city ended up cutting services sharply, gutting its retiree health plan, adding a 1 percent sales tax and cutting payments on its bonds. But its police officers and firefighters still qualify for full retirement at 50, and other city workers at 55.

Since Vallejo made no effort to cut pensions in bankruptcy, the legal issues remain untested, said Mr. Spiotto, the Chapter 9 lawyer.

“It’s something that’s in the process of being worked out, not only in California, but in every state,” he said. “It’s a global issue.”

A Calpers spokeswoman responded to questions by providing a 20-page position paper on the laws that protect public pensions in California. The report did not mention bankruptcy but acknowledged that some California cities were struggling.

“It will be vitally important for all interested parties to heed the legal rules protecting the vested rights of Calpers’s members,” the paper said. Challenges “may lead only to additional litigation and administrative costs.”

Critics in academic and legal circles say they believe Calpers wants to keep municipalities in its system because it needs to keep their contributions flowing in without interruption to cover the payouts it makes each month to retirees. Gov. Jerry Brown called that situation “a Ponzi scheme” last December, when he proposed a plan to lower public pension costs gradually, by offering smaller pensions to the workers that cities will hire in the future. The governor’s plan was strongly opposed by public employees’ unions, which have a strong voice in Calpers, and his fellow Democrats in the state Legislature have let it languish.

After Vallejo’s bankruptcy, Calpers’s board passed another rule that any municipality wanting to withdraw from its system would have to first pay off its shortfall, calculated in a way that makes the payment two to three times as big as in the past.

Stockton’s city manager, Robert Deis, is focusing on cutting retiree health benefits instead of pensions, because he said the retiree health plan was completely unfunded — as opposed to its pension being 70 percent funded — and the cost was growing at a faster rate.

Changing the pensions would also be complicated by the fact that some of Stockton’s retirees get both pensions and Social Security, and others get only their city pensions.

Still, the city’s annual contributions to Calpers for pensions, currently $30 million, are greater than its retiree health costs, $9 million this year. Even before the collapse of 2008, Stockton was struggling with its pension contributions. In 2007, it issued bonds to raise the cash it needed to send to Calpers. But then Calpers’s investments took a pounding in 2008, leaving Stockton with a new pension shortfall to cover — plus about $7 million of principal and interest to pay on the bonds every year.

Bankruptcy lawyers said that if such issues were not addressed in Stockton, they were likely to come up elsewhere soon.

“There are a bunch of cities in bad shape, and pensions are part of the problem,” said Mr. Skeel. “If you have a string of Chapter 9’s, I don’t think every one of them is going to say, ‘This enormous obligation can’t be touched.’ I think one of them is going to take the plunge.”

[bearishgurl]

This is an uphill battle for CA jurisdictions. They would do better to focus on their (unfunded) retiree healthcare (which had never been contracted for in the first place). This undoubtedly would leave many public retirees under the age of 65 paying their entire premiums out of their pensions at COBRA rates.

Some of these retirees (under 50%, IMHO) will medically qualify for an HDHP on the open market at half the monthly premium that their pension plan would charge them (if their retiree health benefits are taken away). The vast majority of public retirees, of course, are “used to” more “comprehensive coverage” but an HDHP offers far more freedom and is preferable for all parties in this instance, IMO, in order to reduce jurisdictions’ retirement funding obligations.

I just don’t see BK courts as having the ability to gut the corpus of the pensions of those public employees already retired to soon to be retired.

CA jurisdictions MAY be able to, HAVE been able to and WILL be able to, however, increase vesting times and change the calculations by which a pension is calculated for those existing employees with less than approx 10-12 years of service, as well as new hires.

[CA renter]

Yes, the changes will have to happen on the contribution side, not the benefit side.

[UCGal]

As mentioned in the article – retiree health care will be hit first. There’s legal precedent – even when it *is* contractually indicated (as in union contracts).
I’m just finishing up an excellent book called “Retirement Heist” by Ellen Shultz (WSJ). She goes into great detail how healthcare benefits were much easier to cut and then eliminate, compared to pensions.

Her book does not cover public employee plans. But it’s pretty eye opening anyway.

[Anonymous]

“Retirement Heist” is a very appropriate title.

Healthy 55 year-olds taking money from schools and the poor so that they can play golf every day is downright criminal.

[CA renter]

[quote=pri_dk]”Retirement Heist” is a very appropriate title.

Healthy 55 year-olds taking money from schools and the poor so that they can play golf every day is downright criminal.[/quote]

Yes, it’s a “heist” alright…

Many public entities are guity of the same thing, but it was not as egregious because the “pension holidays” (which unions fought) didn’t last as long as they did in the private sector.

About the book:

“As companies have been moving away from traditional pension plans, they have been shifting employees to new retirement plans, such as 401(k)s, that transfer the cost — and the risk — to workers.

Companies have claimed for years that old-style pensions were unsustainable. Author Ellen Schultz tells Morning Edition host Steve Inskeep that there’s another explanation.

“The main narrative is that [companies] are struggling to pay both their pensions and these unexpectedly high health care costs for the retirees,” Schultz says. “What isn’t known is that companies were well-prepared for this phenomenon. The plans were in fact significantly overfunded. They had more than enough to pay every dime for every person currently employed and already retired.”

Schultz investigated the changes in pension plans as a reporter for The Wall Street Journal and has written a book called Retirement Heist.

In the early 1990s, Schultz says, companies were looking for new ways to push out workers, especially older, more expensive ones. She says the expensive way would have been to pay severance, “but the cost-effective way was to instead promise them a bit more pension money in lieu of severance.” In the end, “you’ve just laid off somebody who’s expensive and it has cost you nothing.”

Schultz cites this example of one well-known company whose pension fund has dropped significantly since the early 1990s. General Electric announced it was closing its pension plan to be more competitive. She says the company’s financial filings show that GE has not put a cent into its pension plans since the mid-1980s. Over the years, GE, like most large companies, used assets in the plans to pay for other things.”

http://www.npr.org/2011/09/29/140344871/retirement-heist-how-firms-trimmed-pensions

[Anonymous]

Who are the “powers that be?”

CalPERS has $200 billion.

Koch industries has $50 billion.

Who is the bigger financial bully?

[briansd1]

[quote=pri_dk]”Retirement Heist” is a very appropriate title.

Healthy 55 year-olds taking money from schools and the poor so that they can play golf every day is downright criminal.[/quote]

I agree. That’s where the problem lies.

It’s not like those 55yo can’t work and be productive. In the mean time, services to schools and the poor are being cut to that retirement payments can be made.

[sdrealtor]

I just played 36 holes of golf in the desert with one of them yesterday. He asked me why I couldn’t just put the smartphone down for a few hours and enjoy the game. I told him I needed to keep working so my taxes could cover his green fees. He just smirked and continued kicking my ass on the golf course.

[bearishgurl]

[quote=briansd1][quote=pri_dk]”Retirement Heist” is a very appropriate title.

Healthy 55 year-olds taking money from schools and the poor so that they can play golf every day is downright criminal.[/quote]

I agree. That’s where the problem lies.

It’s not like those 55yo can’t work and be productive. In the mean time, services to schools and the poor are being cut to that retirement payments can be made.[/quote]

Uh, pri_dk, the 55-65 yo set I’m acquainted with (my contemporaries) DON’T play golf every day (or even play golf). The vast majority are still working FT, even if “consulting” on a PT basis.

brian, I AGREE that a 55+ yo is capable of working. Feel free to TELL THIS TO THE EMPLOYERS that won’t hire them under any circumstances!

Actually, this “boomer set” you speak of here was downsized, riffed, “laid off” and took “mandatory early retirement” in the last 15 years, very often NOT OF THEIR OWN CHOICE. To the detriment of their employers, they walked out the door with their intellectual property between their ears.

And rightly so. You can’t have it both ways.

The vast majority of these “over 55’s” would like to work FT today but can’t get hired. Level of education and experience makes no difference.

Take SD Superior Court, for example. The vast majority of the relative *newbies* working the public filing counters are ignorant of CA Rules of Court and CA Code of Civil Procedure and there is often no supervisor immediately available, especially in branch courts. When they are confronted with a document they are unfamiliar with, that isn’t on one of their “forms,” (usually a “litigation” doc) they refuse to file it and the (expensive) attorney, attorney svc or paralegal has to wait around for a “supervisor” or “mgr” to return from lunch, mtg or break to “examine” the document. These documents are very time sensitive and the service in there is often poor. In addition, they are only open now from 8:30 to 3:30 pm, a full TWO HOURS LESS per day than when they were staffed by the “boomer set” that is now “retired!” And between 12:00 and 2:00, 5-6 windows are reduced to 2 windows, to allow for lunch breaks.

I would advise EVERYONE to keep their skirmishes out of court if at all possible as the “system” isn’t anywhere near as efficient as it used to be.

**************

pri_dk, the REAL REASON the money is not there to fund school extras such as lay-teachers and FT counselors and programs for the poor, such as TANF, Section 8 and the EBT program are grossly impacted is primarily because of unfunded mandates.

In other words, states, school districts and counties are “mandated” by Federal law to provide certain services to subsets of residents yet have never been funded sufficiently by the Federal govm’t to do so! CA bears the brunt of this problem due to it being a border state. Believe me when I tell you that the AG’s office and county counsels around the state have whole divisions dedicated to this issue and are in litigation EVERY DAY, ALL DAY with each other and the Federal govm’t to receive CA’s (and counties’) fair share of funds to operate these “mandated” programs.

This problem has been going on since the dawn of time but has been exacerbated in recent decades due in part to the 1986 Amnesty Act as well as different CA cities being chosen by the Federal govm’t for resettling large numbers of war-torn and/or third-world foreign nationals.

As far as frills such as “Seminar” and “GATE” being dropped from elementary school curriculum around the state due to lack of funds, these programs are “elective fluff” and thus, the first to go in the absence of sufficient grant funding. The CA Education code requires ONLY that public schools teach appropriate progression leading to A – G public university entrance requirements and FAPE, that is … Free and Appropriate Education for all school-age students with professionally diagnosed mental or physical disabilities.

Period.

Band, vocal music and fine arts are nice to have, but school districts are not required to offer them if there is no money to operate the programs.

For instance, trigonometry was even dropped from the SUHSD curriculum in recent years (but can still be taken eves/summers for free at SW College for HS credit).

If CA parents feel their child is “gifted” and can’t find an appropriate public school curriculum or class to “challenge” them enough, they are free to enroll them in private school or private tutoring.

None of these shortfalls has anything to do with “pensions” already promised decades ago.

[briansd1]

BG, such a long post that obfuscates the issue.

As a general rule, I see nothing wrong with old people making way for the younger generations. That’s how it has always worked.

As you said, there were always unfunded mandates. Unfunded mandates don’t explain the larger and larger share of budgets going to retirement benefits.

As far as promises made years ago, promises are made to be broken if there’s no money to pay them. It’s a question of math.

Let’s say I invest at 9% and I promised my wife a vacation home in Hawaii when I retire. I promise my kids that I’d pay for their college educations and weddings. I’d also buy them new cars and new houses when they graduate college.

If there’s a financial crisis and the value of my portfolio collapses, I have to break my promises. Sorry wife and kids. It’s just too bad, but we have to make do with less.

[sdduuuude]

[quote=sdrealtor]I just played 36 holes of golf in the desert with one of them yesterday. He asked me why I couldn’t just put the smartphone down for a few hours and enjoy the game. I told him I needed to keep working so my taxes could cover his green fees. He just smirked and continued kicking my ass on the golf course.[/quote]

– post of the month nominee

[bobby]

Bearishgirl,
one counter point to your argument is that almost everyone is employable at the right wage. maybe those 55-65 y/o don’t want to accept a wage appropriate to their skill level?
If I can hire a 30 y/o with similar skill level for 30% less salary and benefits, I, as a employer with a bottom line, would be foolish to hire someone who ask for much higher salary, whatever their age may be.

[Anonymous]

There are some signs of progress, but still not enough to resolve the core issue:

http://gov.ca.gov/docs/Twelve_Point_Pension_Reform_10.27.11.pdf

A good read. I found this part particularly interesting:

Over time, enriched retirement formulas have allowed employees to retire at ever-earlier ages. Many non-safety employees may now retire at age 55, and many safety employees may retire at age 50, with full retirement benefits. As a consequence, employers have been required to pay for benefits over longer and longer periods of time.

The retirement age for non-safety workers in 1932, when the state created its retirement system, was 65. The retirement age for a state highway patrol officer in 1935 was 60. The life expectancy of a twenty-year old who began working at that time was mid-to-late 60s, meaning that life expectancy beyond retirement was a relatively short period of time. Now with a growing life expectancy, pensions will pay out not just for a few years, but for several decades, requiring public employers to pay pension benefits over much longer periods of time.

One outrageous aspect of this situation is that while public employees make up 15% of the population, it’s only a fraction of public employees that are causing this crisis. Federal pensions are not a serious problem, nor are the recently-hired state and municipal employees.

There is really only one generation of employees – a small minority of the workforce – that is devastating our schools and services. 95% of the population is paying for the comfortable retirements of the other 5%. This “upper 5%” will typically spend a third of their adult lives getting paid for not working while schools and the remaining workforce pick up the tab.

Governor Brown’s plan is now supported by Republican members of the legislature. Polls show the public also supports the plan. The Democrats in Sacramento, however, are still in the back pockets of the unions. It will be interesting to see how deeply the holdouts dig in their heels.

[bearishgurl]

[quote=bobby]Bearishgirl,
one counter point to your argument is that almost everyone is employable at the right wage. maybe those 55-65 y/o don’t want to accept a wage appropriate to their skill level?
If I can hire a 30 y/o with similar skill level for 30% less salary and benefits, I, as a employer with a bottom line, would be foolish to hire someone who ask for much higher salary, whatever their age may be.[/quote]

Bobby, the reality is that a 30 yo doesn’t have a similar skill level as a 55+ yo who has been working in the same industry for decades. Nowhere near it. And they don’t have the “institutional knowledge” to thrive in the industry and not make (often costly and far-reaching) mistakes. They can’t possibly … the difference in experience amounts to 25-35 years and you can’t take that away from the 55 yo.

Vast experience aside, employers won’t even hire 55+ yo’s for today’s “entry level” wages. ESP small biz employers (with <=50 employees). Why? It is primarily due to the cost of health benefits ... everything being equal. Health benefits for this group are 2.5 - 4 times the cost of their 30 yo worker-bee counterparts. And with very small biz (12 or less "employees"), employees sometimes have to medically "qualify" for a health plan, just as in individual coverage. This is true for 70%+ of law firms, for example. Instead, they use the currently unemployed and underemployed "over 55 group" to work as part-part-timers and "consultants" (who receive Form 1099 instead of a W-2 form for the tax year). The over-55 "consultant" or "contract worker" needs 3-4 regular gigs to "eek out a living" from their home offices.

[Author]

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