Rullings In SB Bankruptcy Consistently Go City’s Way

(September 17)  RIVERSIDE—In federal bankruptcy court, the city of San Bernardino continues to rack up victories that in total have begun to chip away at what public employee unions and the massive state public employee pension system have long maintained are their sacrosanct status immunizing them from responsibility in the financial crisis precipitated by too-generous public employee contracts in the past.
Over the last several years, many California cities and governmental agencies are beset with dwindling revenues, an outgrowth of the long stagnating national, state and regional economies. Nearly all municipalities and governmental agencies have seen some drawdown in services provided to constituents and taxpayers. Many of those agencies have experienced layoffs. Others still have negotiated employee givebacks on contracts or less generous contracts going forward.
In the face of all of this, public employee union representatives as well as the representatives of CalPERS, the California Public Employees Retirement System, have asserted that a deal is a deal, and that any contractual commitments made by cities or agencies to their employees or those employees’ bargaining units are etched in stone and cannot be rescinded, even if the financial means to make good on those commitments are drying up. Simultaneously, there have been multiple exposés about how public employees participating in CalPERS and other public employee pension systems  have utilized pension spiking to inflate the pensions they receive to annual payouts that exceed the amount of salary those employees were paid during their highest earning year while actually working. This practice, which was outlawed by the state of California in 1938, proliferated nonetheless. An employee would pension spike by waiting until he or she had been promoted to a high position, thereby receiving a high salary, and at that time collect deferred vacation time payouts, sick leave payouts, education coverage payouts, communication device payouts, clothing payouts, travel payouts, computer payouts and the like. During that year, the employee’s total compensation would reach an amount that in some cases exceeded 150 percent or approached 200 percent of his or her highest salary. That total compensation for that year would then be used to calculate the amount of that individual’s pension. In this way, former San Bernardino County Undersheriff Richard Beemer is drawing an annual pension of $290,901.96, even though his highest annual salary was $196,000.
In 2012, the pension spiking scandal had resonated so loudly that the state legislature outlawed its use by any public employees hired on January 1, 2013 or thereafter. CalPERS has nonetheless maintained that its retirees are due the pensions they qualify for under whatever formulas were said to be in place at the time those employees applied for them.
CalPERS lawyers have been leashed upon any entities, public or private, which maintain differently.
The bankruptcy filings of three major California cities – Stockton, Vallejo and San Bernardino – set the stage for whether the guarantees provided to public employees that they can collect on their benefits – no matter how generous – are as ironclad as their representatives state.
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,  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  both its police and fire unions, which have disputes with the city over the declining revenue available for public safety employee salaries.
In June came word that the attorneys for the city and CalPERS had 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.
That secrecy is an indication that the terms worked out were less than absolutely favorable to CalPERS, and that the confidentiality is being maintained to limit damage to the pension system’s position in any future bankruptcy proceedings.
This week, Judge Jury entered two tentative decisions that favored the city in its ongoing efforts to come to terms with the union for its firefighters.
In the first of those, Jury tossed out the current bargaining agreement between firefighters and the city, giving the city authority to impose a new contract not agreed to by the firefighting rank and file. The city appealed to Jury by telling her it wanted to jettison the existing contract to allow it to opt out of a mandatory constant staffing protocol and instead institute selective minimum staffing during shifts when those firefighters’ presence is not critical, thereby saving up to $4 million in overtime pay the city shells out to firefighters in a typical year. The city also asked Jury to allow it to mandate that firefighters pay the retirement contributions that the city until January 2013 paid toward the firefighters pensions.
Jury’s ruling gave the city the flexibility to float the proposals but did not lock them in, at least as of yet. Jury said the city would need to abide by, at least for now, a city charter provision that requires city public safety employee salaries stay at an average of what is paid their counterparts in ten other similarly sized California cities. That charter provision is going before city voters in November for possible revision.
Jury also tentatively rejected the firefighter union’s motion to be let out from under a stay that prohibits the filing of a suit against the city while its bankruptcy is pending. Firefighters wanted leave to file a suit because their attorneys maintain the city had violated certain provisions of state law pertaining to the conduct of negotiations.

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