San Bernardino City Employees In Danger of Losing Their Pensions

(October 26)  SAN BERNARDINO—The city of San Bernardino is on the brink of skipping out on pension payments to its retirees.
While pension payments to those who once worked for the city are at this moment still being made, the city, which declared bankruptcy nearly three months ago, is risking draconian action by the California Public Employee Retirement System by not making any of the payments to the state pension system it was contractually committed to make as a participant in the system. No payments have been made since the city’s bankruptcy filing in August.
City officials maintain they are not making the payments because they simply cannot – there is not enough money in city coffers to pay many of its creditors. The city currently is $5.3 million in arrears to the system, known by its acronym CalPERS.
With expenditures and debt outrunning revenue, there is not even a clear consensus among the city’s decision makers about what payments the city should make with its available remaining resources after day-to-day operations are taken care of.
The city council and city management have committed to maintaining the operation of current essential services and making payroll to keep current city staff in place. Other expenses are being put on hold while the city’s creditors are forced to stand in line at bankruptcy court to ensure some portion of payment on that outstanding debt in the future, pursuant to the restructuring of that debt and a federal judge’s orders.
Meanwhile, the California Public Employee Retirement System, which is a vacuum for an increasingly large percentage of city capital, is of the opinion that the contractual arrangement between it and the city is not something that can be attenuated in bankruptcy court. That contract gives CalPERS the authority, or so CalPERS maintains, to assert priority for available remaining city money. Ultimately, if the city’s obligations to CalPERS are not met and met soon, retirement payments to former San Bernardino city workers will cease, CalPERS officials state.
Another major California city that has filed for bankruptcy protection is Stockton. Unlike San Bernardino, however, Stockton is continuing to make its scheduled payments to CalPERS. And while San Bernardino officials are seeking to defer payments to the system, CalPERS officials are inching closer to terminating the plan with San Bernardino, endangering not only the future pensions of current employees but the current pensions of former employees.
According to CalPERS general counsel Peter Mixon, San Bernardino officials are mistaken in their belief that the bankruptcy court has authority over the retirement system, which he said is not subject to bankruptcy protection provisions because it is part of the state government.
“Several public agencies that provide retirement benefits through CalPERS have recently filed for bankruptcy under Chapter 9 of the Bankruptcy Code,” Mixon said. “CalPERS is a creditor of these agencies and of course has an interest in the outcome of these bankruptcy proceedings. CalPERS is, of course, an arm of the State of California. California, like every other State in the Union, has sovereign powers. The United States Constitution created a system of dual sovereignty which divides powers between the federal government and the states. The United States Supreme Court has held on several occasions that certain state laws, which may inhibit the power of a bankruptcy court, are not preempted by the Supremacy Clause.”
Mixon continued, “The drafters of the Bankruptcy Code acknowledged that certain powers have been reserved to the states under the United States Constitution and therefore limit the power of the Bankruptcy Court to interfere with the state’s control over municipalities and state agencies in a bankruptcy case. In enacting section 903 of the Bankruptcy Code, Congress further determined that Chapter 9 of the Bankruptcy Code would not preempt state laws that control the political and governmental powers of municipalities and arms of the state. Congress acted wisely to avoid a constitutional clash by preserving the authority of states over their core aspects of sovereignty in any municipal bankruptcy case. The limitations on the power of the bankruptcy courts extend to the relationship between CalPERS and a participating public agency employer. The relationship between CalPERS and a municipal employer is not a mere commercial contract between a creditor and a debtor. Instead, it is an aspect of the state’s control over a municipality that is protected from interference under constitutional principles and federal bankruptcy law. Accordingly, Chapter 9 of the Bankruptcy Code does not preempt the State of California’s control over the system of benefits provided to its employees and the employees of participating municipalities.
An agreement between a municipality and CalPERS reflects the choice of the municipality to participate in the system. Once a municipality commences its relationship with CalPERS, the municipality is bound by the constitutional and statutory provisions governing the system and the decisions of the CalPERS board of administration  As created by the legislature, the CalPERS pension plan is a trust fund, which consists of the assets that are needed to pay retirement and other benefits that participating public employers have promised to their employees.”
Mixon intimated that if San Bernardino ceases to hold up its end of the bargain it has with CalPERS, CalPERS will be put into a position of having to end its payments to San Bernardino retirees.
“As trustee of the retirement system, CalPERS is a fiduciary and must ensure the integrity of the State of California’s benefits system,” Mixon said. “CalPERS does not have the right to ‘forgive’ or reduce employer contributions which are necessary to sustain the soundness of the system and ensure the payment of promised benefits.
Under the law of the State of California, a participating public employer in bankruptcy may not terminate its relationship with CalPERS through ‘rejection’ of its‘contract’ with CalPERS in the bankruptcy proceeding.”
If San Bernardino withdraws entirely from CalPERS, Mixon said, CalPERS would have the option of ceasing pension payments to San Bernardino’s retirees or in the alternative laying claim to some of the city’s assets and liquidating them in order to continue to make pension payments to San Bernardino city retirees.
“Participating public agency employers do have the right, under California law, to terminate their relationship with CalPERS,” Mixon said. “However, termination of this relationship does not terminate the obligations of the public agency to make contributions to CalPERS to fund benefits accrued prior to termination. Instead, California law provides for a valuation of the assets and liabilities of the employer at the time of termination. Because termination of the relationship essentially closes the pension plan, any unfunded liabilities as of termination must be fully paid by the employer. These amounts are typically much larger than the ongoing obligations owed by the employer prior to termination. Termination by a municipal debtor would create a much larger obligation to CalPERS, which would impair the ability of the debtor to make payments to its unsecured creditors and severely dilute the return to such creditors.  When a participating public agency terminates its relationship with CalPERS, CalPERS is entitled to priority over unsecured creditors under the laws of the State of California. An example of a statute that affords CalPERS a priority is California Government Code Section 20574. This statute provides that CalPERS has a lien on all assets of a municipality to secure all liabilities of the municipality to CalPERS owing upon a termination of the relationship, including any deficit in funding for earned benefits, interest, and attorneys’ fees and other collection costs. As secured creditors are paid before unsecured creditors, this lien creates a priority in favor of CalPERS.”

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