Upand Damning The Torpedoes On Issuance Of Pension Obligation Bonds

By Mark Gutglueck
The City of Upland is moving full speed ahead in its lawsuit against the city’s 77,754 residents.
Because of generous commitments made by past city councils going back more than three decades, the City of Upland has an accrued pension debt that is close to three times its annual budget. The current outstanding debt the City of Upland has to the California Public Employees Retirement System to cover the cost of the pensions being paid to already retired former Upland City employees and the anticipated cost of paying present employees their pensions in the future is referred to, in municipal parlance, as Upland’s unfunded pension liability. More than nine years ago, as of June 30, 2012, Upland’s unfunded pension liability had reached $88,994,066. It rose modestly but steadily for the seven years thereafter, jumping almost $11 million, reaching $99,976,917 as of June 30, 2019. Over the last two years, Upland’s pension debt escalation has been historically steep. During the six months after June 30, 2019 alone, the pension debt grew by more than it had in the previous seven years, hitting $112,039,675 by the midway point of fiscal year 2019-20 on December 31, 2019. As of June 30, 2020, it stood at $120,920,721. A document issued by the city in March 2021 indicated the city’s unfunded pension liability as of that month had reached $130,186,277.
For years, a small but vocal group of Upland residents, including Larry Kinley, who had been elected Upland Treasurer in 2016, had been pushing for municipal pension reform. Concerned at the growing pension debt, which was consuming more and more of the city’s budget on a yearly basis and reducing the amount of money available for the delivery of municipal services, they called for the city to both change the terms of city employee contracts to eliminate the generous pension benefits provided to city employees going forward and for an end of the city’s affiliation with the California Public Employees Retirement System.
City employees, however, were acutely aware that if the city undertook to reform its pension system, they would see their pensions commensurately reduced. Then-City Manager Rosemary Hoerning and Assistant City Manager Steven Parker, both of whom are participants in the California Public Employees Retirement System, prevailed upon the city council to allow them to bring in advisors to advise elected officials on how the pension funding crisis should be dealt with. Hoerning and Parker then hired Urban Futures, which employs numerous current and former participants in the California Public Employees Retirement System and which stood to pick up further fees as the city’s bond issuance coordinator if the city elected to issue bonds as a strategy to come to terms with the financial challenge its overwhelming pension debt represented, to serve as the city’s pension debt advisor. The city also relied upon City Attorney Steve Deitsch for advice with regard to coming to its debt management options. Deitsch’s law firm, Best Best & Krieger, stood to pick up fees by doing legal work relating to the issuance of the bonds. After being counseled by both Deitsch and Urban Futures Managing Director Julio Morales, the city council decided against pulling out of the California Public Employees’ Retirement System and switching city employees to a more modest retirement program in which they as employees and the city as their employer would contribute money into a fund that would provide somewhat less-generous retirement benefits than are provided by the California Public Employees Retirement System. Rather, the council was convinced by Hoerning, Parker, Deitsch and Morales to remain in the California Public Employees Retirement System and instead issue $120 million in pension obligation bonds, which will allow the city to spread the payment of the money it owes to the California Public Employees Retirement System over the next 25 to 40 years, deferring the pension debt onto the next two succeeding generations of Upland’s taxpayers, transferring the responsibility to the current city residents’ children and grandchildren.
Morales and Deitsch allayed any concerns Mayor Bill Velto and the individual members of the council had about the process of taking on bonded indebtedness. Under normal situations in California, before new taxes or assessments can be imposed on residents or citizens, they must first assent to the new tax or tax increase through a majority vote in favor of that increase or new tax. What if, the council asked, a majority of Upland’s residents refused to impose on themselves the fees or tax they would need to bear over 25 years or 30 years or 35 years or 40 years to repay the purchasers of the bonds? The city could steer around having to hold such a vote, Morales and Deitsch told the council, by having the city file a lawsuit against all of the city’s residents in a legal action known as a validation complaint. If, upon the filing of the lawsuit, none of the city’s residents responded within 30 days with an answer that challenged the city’s intention to issue the bonds, the city would be free to create and sell bonds, and no future challenge to their issuance or the commitment that the city council made on behalf of the city’s taxpayers that they would pay the bondholders could be made.
In April 2021 and then in May 2021, after the mayor and city council and Hoerning had come to an agreement for Hoerning to leave as city manager and Parker was promoted into the post of acting city manager, the city council set the city on a course to issue at least $120 million in pension obligation bonds. It did so as quietly as it could, taking that action as part of the consent calendars at its April 26 and May10 meetings. Normally, in Upland and all cities elsewhere, the consent calendar is reserved for routine and noncontroversial issues that merit no discussion. The practice in Upland as elsewhere is to not consider any of the items that occur on the consent calendar individually but to vote on them collectively. In this way, it is very easy for the pubic to take no note of the items on the consent calendar. Accordingly, the public is very likely to miss the significance of any items that appear on the consent calendar and to have no understanding whatsoever or awareness of the substance of consent calendar items.
At its April 26 meeting, the city council, in a single vote taken relating to five other items that appeared on the consent calendar along with it, approved a $62,500 professional services agreement with Urban Futures relating to assistance it would give the city in issuing pension obligation bonds.
On May 10, the city council, on a single item of a 16-item consent calendar, agreed to pay Best Best & Krieger, the law firm with which Steve Deitsch is a partner, $70,000 for its assistance in readying the city for the bond issuance. The $70,000 consisted of $45,000 to serve as bond counsel, $20,000 to handle the validation proceeding and $5,000 to cover miscellaneous court costs. Another item on the consent calendar approved by the council provided for paying the law firm of Straddling, Yocca, Carlson & Rauth $36,500 to serve as the disclosure counsel on the city’s issuance of pension obligation bonds.
On July 21, 2021, the City of Upland filed the validation action against all interested parties.
On August 9, in an equally stealthy move as those taken in April and May, as an item on its eight-item consent calendar agenda, the council hired J.P. Morgan Securities LLC as the managing underwriter and Stifel, Nicolaus & Company, Incorporated as the co-managing underwriter for the proposed pension obligation bond issuance.
On August 12, the city filed a summons with the court, with language intended to inform all Upland residents that they were being sued.
When a small contingent of Upland residents took note of what was going on at the courthouse, they inquired about the city suing its residents.
Parker, as acting city manager, put out a statement. In it he denied the city was suing anyone.
“The city has not directly or even indirectly sued its constituents,” Parker said. “What the city has done is filed a validation lawsuit regarding the potential issuance of pension obligation bonds. Under the rules imposed by the State of California, the city is required to file a complaint ‘in rem.’ This means that it is required by law to be stylized against ‘all persons interested’ in the matter.”
The term “in rem” designates that the lawsuit is against the residents of Upland together rather than against the residents individually.
Over the next several weeks, both Councilwoman Shannan Maust and Councilwoman Janice Elliott parroted Parker.
On September 9, the Inland Valley Daily Bulletin ran a legal notice. The language of the notice states:
Case Number: CIV SB 2121939
Notice to Defendant: All persons interested in the matter of the proceeding for the issuance and sale of bonds for the purpose of refunding certain obligations that the city of Upland owes to the California Public Employees’ Retirement System (PERS) arising under PERS contract and the public employees retirement law, and certain proceedings leading thereto, including the adoption of a resolution that authorizes the issuance of pension obligation bonds, and the execution and the delivery of trust agreement and bond purchase agreement relating to the issuance of such bonds, You are being sued by plaintiff: City of Upland
Notice! You have been sued. The court may decide against you without your being heard unless you respond within 30 days. Read the information below. You have 30 calendar days after this summons and legal papers are served on you to file a written response at this court and have a copy served on the plaintiff. A letter or phone call will not protect you. Your written response must be in proper legal form if you want the court to hear your case. There may be a court form that you can use for your response. You can find these court forms and more information at the California Courts Online Self-Help Center (www .courtinfo.ca.gov /selfhelp), your county law library, or the courthouse nearest you. If you cannot pay the filing fee, ask the court clerk for a fee waiver form. If you do not file your response on time, you may lose the case by default, and your wages, money, and property may be taken without further warning from the court. There are other legal requirements. You may want to call an attorney right away. If you do not know an attorney, you may want to call an attorney referral service. If you cannot afford an attorney, you may be eligible for free legal services from a nonprofit legal services program. You can locate these nonprofit groups at the California Legal Services Web site (www .lawhelpcalifornia.org), the California Courts Online Self-Help Center (www .courtinfo.ca.gov / selfhelp), or by contacting your local court or county bar association. Note: The court has a statutory lien for waived fees and costs on any settlement or arbitration award of $10,000 or more in a civil case. The court’s lien must be paid before the court will dismiss the case.
The legal notice lists the address of the court where the matter is filed, the San Bernardino County Superior Court on Third Street in San Bernardino. It identifies the attorney representing the city in the validation action as Scott W. Ditfurth of the law firm of Best & Kreiger, along with the address of the law firm together with the law firm’s phone number, (951) 686-1450.

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