“Nothing focuses the mind like a hanging,” said Samuel Johnson. But bankruptcy may come pretty close. We’re seeing that now as three California cities this year filed for bankruptcy: San Bernardino, Stockton and Mammoth Lakes.
In the case of San Bernardino, the giant California Public Employees Retirement System filed court papers last week calling the bankruptcy a “sham” and “criminal behavior” designed to get the city out of required payments to CalPERS for city worker pensions.
“At issue is whether the pensions of government workers take precedence over other payments in a municipal bankruptcy,” reported the San Bernardino Sun, “which could have ramifications for municipal creditors, including Wall Street bondholders, as more cities and towns have trouble meeting their obligations.”
There’s some merit to both sides of this controversy, Marcia Fritz told us; she’s the president of the California Foundation for Fiscal Responsibility, which works for pension reform. “If you can’t pay your bills in a timely fashion, then you’re in bankruptcy.”
On the other hand, she said, “Since San Bernardino has not adjusted or frozen its benefits, CalPERS has a point that the city should continue to pay.” The city still is functioning. Its debts are frozen, but it’s still paying many of its bills, but not some others, such as to CalPERS. “Until San Bernardino stops the benefits, it might have to pay them.”
However, she cautioned, “What CalPERS is doing is going to bite them. The city might stop the benefits.” That is, CalPERS’ action could force the city to renegotiate benefits with its employees to exclude participating in CalPERS.
She added that another problem is the “easy payment plans” offered to cities that have made participating in the plan too easy. Earlier this year, CalPERS dropped to 7.5 percent from 7.75 percent the expected annual rate of return of its investments. However, a 2011 study by the Stanford Institute for Economic Policy Research suggested that 6.2 percent (or even lower) is more realistic.
Of course, lowering the expected rate of return on investments would mean contributing members, such as the city of San Bernardino, would have paid more into the fund. And paying more all along might have revealed the city’s troubled finances years ago.
As CalPERS wrote in its challenge to San Bernardino’s bankruptcy, “The city gravely needs to get its house in order. … Ten years of history suggest that the city is not going to implement meaningful change until forced to do so. This court needs to hold the city’s feet to the fire.”
But city, county, state and pension officials also need their feet held to the fire by Californians. The reality is that, unless reforms are made, many other municipalities will follow San Bernardino through the Chapter 9 inferno.
