SB & CalPERS Come To An Agreement

San Bernardino and the state of California’s public employee retirement system have apparently staved off a potentially earth-scorching battle over the city’s arrearages on pension payments that threatened to undermine the city’s 2012 bankruptcy filing and also threatened to set a precedent by which financially troubled cities might skip out on their obligations in a way that would undercut the pension system’s integrity.
After years of financial challenges, San Bernardino filed a Chapter 9 bankruptcy petition in August 2012. In its filing, the county seat asserted it had $180 million in ongoing unfunded liabilities and a $49 million annual operating deficit. Shortly thereafter, the state’s public employees retirement system, known by its acronym CalPERS, contested the city’s filing, maintaining San Bernardino has hundreds of millions of dollars worth of assets it could liquidate to make good on its responsibility to its creditors.
CalPERS is San Bernardino’s largest creditor. The city currently has a $26 million annual obligation to the retirement system and it withheld more than $14 million in pension fund payments from July 2012 until July of 2013 and has continued to underpay CalPERS the amount the system’s administrators maintain is continuously due it. The city has offered to make partial payments into the system until such time as it gets back on its feet financially. Even more alarming to CalPERS was the city’s effort to forge a long-term solution that includes renegotiating the amount of its commitment to the retirement system altogether.
CalPERS deemed such an eventuality unacceptable, as it would set a precedent in California of allowing municipalities in financial straits to stiff the pension system. Moreover, the reduction of the pensions of retired or soon-to-retire employees in cities seeking to dodge their commitments to the system could severely undercut the faith of the state’s public employees in the system, a crisis of confidence that could lead to the system’s demise.
In addition to opposing San Bernardino’s bankruptcy petition outright, CalPERS asserted that the pension fund system has a special status among the city’s creditors and that it should go to the front of the line when the city begins to pay those to whom it is in arrears. The federal bankruptcy judge overseeing San Bernardino’s bankruptcy filing, Judge Meredith Jury, did not accept that, ruling that CalPERS has no greater or lesser standing than the scores of other entities the city owes money to.
Moreover, Jury consistently ruled that San Bernardino is as insolvent as it claims. In August 2013, she ruled that the city’s bankruptcy should be granted pursuant to a pendency plan by which the city continues to pay its employees and other expenses critical to its day-to-day operations but services its other debts on the basis of the limited financial means available to it.
CalPERS wanted out of Jury’s courtroom and previously pressed for leave to appeal the matter to another judge, a request Jury denied.
CalPERS took a writ to U.S. District Court in Los Angeles, where Judge Dolly Gee granted the pension fund’s request to appeal Jury’s findings directly to the 9th Circuit Court of Appeals.
While the California Public Employees’ Retirement System’s request to have the 9th Circuit here the case was pending, further efforts at mediation between the city of San Bernardino and CalPERS continued under the guidance of a court-appointed mediator, Judge Gregg Zive.
The mediation between the city and CalPERS was not the only touchy issue that grew out of the bankruptcy. The city is also involved in delicate negotiations with creditors, bondholders, service providers and vendors, as well as city employee bargaining groups.
In May, Jury expressed dismay at the lack of progress in the mediation talks and said the delay in coming to a workable arrangement with CalPERS was preventing the city from coming to terms with the both its police and fire unions, which have disputes with the city over the declining revenue available for public safety employee salaries.
Last week came word that the attorneys for the city and CalPERS have arrived at some form of tentative agreement that will allow the city’s bankruptcy reorganization plan to proceed,  though the terms remain secret.
A terse case status update noted that the terms of the agreement were in Zive’s possession, and an early draft of the agreement had been provided to attorneys for the city’s employee unions and the legal representatives of the city’s other creditors. That document was subject to the confidentiality restrictions imposed by Jury with regard to the mediation effort, such that no public disclosure of any of the agreement’s particulars has been made.
A court filing, however, confirmed that tentative agreement, to which the city and CalPERS are amenable, has been forged.
“The details of the agreement, including the timing and amount of payments to be made, will remain confidential as the mediation regarding a potential plan of adjustment is ongoing,” the filing states. The filing further indicates CalPERS for the time will hold in abeyance its appeal of Jury’s ruling to the 9th Circuit Court in which it asserts the city isn’t eligible for bankruptcy.
In return, the city is to “make certain payments to CalPERS on deferred amounts owing.”  The precise amounts the city will pay has not been disclosed. CalPERS maintains the city is at least $16.5 million behind on its payments since July 2012, and owes interest on that arrearage. San Bernardino, in its pendency plan, announced its intention to eventually make CalPERS whole, but has not provided a schedule for doing so.
Because of the confidentiality surrounding the tentative agreement and its precise terms, it is not publicly known whether the break CalPERS has assented to cutting San Bernardino on the money owed it is temporary or permanent, or whether it includes interest payments on the overdue payments or not.
Disclosure of those terms might be counter to CalPERS’ interest, since other large California cities, such as Stockton and Vallejo have declared bankruptcy and other California cities are contemplating such a move. Those cities might seek terms relating to long term debt repayment similar to those CalPERS agrees to with San Bernardino.
The ongoing negotiations between the city and its two most powerful employee unions, those for the fire department and the police department, have been nearly as tense as those with CalPERS.
The San Bernardino City Professional Firefighters have charged that the city has not been negotiating in good faith, and has been less than straightforward in disclosing the city’s actual financial condition. For example, according to the firefighters union, between June 2012, just prior to the city’s bankruptcy filing, and December 2013, the city invested $53 million in notes and federal agency-issued coupons, certificates of deposit, local agency investment funds and other securities. Moreover, according to the firefighters’ union, the city made another $23 million in investments during the first four months of 2014.
City negotiations with the firefighters union on its memorandum of understanding setting salaries and benefits for firefighters are ongoing.
Previously, the city and the San Bernardino Police Officers Association were at loggerheads. But recently, negotiators for the city and the police union have indicated they are within striking distance of closing an agreement on the memorandum of understanding relating to police pay and benefits.
The city is scheduled to come before Jury for an update on its progress toward exiting from bankruptcy protection on July 10.

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