Less than two months ago, the Upland City Council gave up on the strategy of utilizing pension obligation bonds to defer for another 20 years coming to terms with the crushing pension debt the city took on in accordance with concessions made to the city’s public employees unions in the past. Next week, the council is set to again consider a bond funding scheme to pass the city’s past and current financial commitments on to the city’s succeeding generations.
This time around, city officials, led by Assistant City Manager Steven Parker, are hoping they can sell the concept of creating future financial obligations to be retired by the children and grandchildren of the current crop of the city’s taxpayers by insisting that the new approach, even though it too is dependent on bond financing, will “blast away” the city’s intractable pension debt.
Upland, like many other California cities, is facing a financial crisis brought on by its commitment to providing generous – what many consider to be overly generous – retirement benefits to its municipal employees past and current. In Upland, the problem is particularly intense, largely as a consequence of the widespread graft that was engaged in by Upland’s political leadership which spread to virtually all of the city’s employees.
In the first decade of the Third Millennium, John Pomierski served as Upland’s mayor. He was taking all order of bribes from individuals and businesses that had applications for franchises, contracts or project approvals at City Hall. In the course of things, more and more city employees came to understand what Pomierski was up to. With the assistance of his handpicked city manager, Robb Quincey, Pomierski arranged to buy the silence of those city employees by offering them employment contract enhancements that included a significant increase in the pension payouts those employees would receive through the California Public Employees Retirement System.
Ultimately, Pomierski’s and Quincey’s depredations at City Hall were revealed. Pomierski was indicted on bribery charges in 2011 and convicted in 2012, whereupon he was sentenced to two years in a federal penitentiary. Quincey, who was fired in 2011, was charged by the San Bernardino County District Attorney’s Office in 2012 with misappropriation of public funds, gaining personal interest from a public contract and perjury. In 2014, after extended plea negotiations with prosecutors, he pleaded guilty to reduced charges.
Despite Pomierski’s and Quincey’s legal comeuppance, their coconspirators in the scams they had pulled – the municipal employees who had maintained their silence about what they knew was going on at City Hall – continued to reap the fruit of the arrangement that they had made with the disgraced mayor and city manager to keep the corruption at City Hall under wraps. None of those employees were ever asked to undo the generous salary increases and accompanying pension enhancements they were provided during the Pomierski administration.
Consequently, the city’s pension debt continued to escalate at an astronomical rate.
As of June 2012, the City of Upland had an $88,994,066 unfunded pension liability. That debt had reached $99,976,917 as of June 30, 2019, and then climbed more steeply thereafter, hitting $112,039,675 at mid-fiscal year of 2019-20 and $120,920,721 as of June 30, 2020. Unofficial documentation available to the Sentinel suggests that by March 2021, Upland’s unfunded pension liability had climbed to $130,185,277.
In fiscal year 2020-21, 20.65 percent of the city’s operating costs were devoted to paying those who were no longer actively working for the city, with $8,996,364 of the city’s $43,559,950.78 general fund budget being utilized in paying off its pension debt.
Projections are that 11 years from now, in 2032, with more and more of the city’s current employees joining the rolls of the city’s retirees drawing pensions at ever higher and higher rates, the city will be expending more than 50 percent of its operating budget on paying pensions to former city employees, resulting in the city either drastically reducing the municipal services it provides, declaring bankruptcy or disincorporating to allow the City of Ontario, the City of Rancho Cucamonga or the County of San Bernardino to inherit the burden of continuing to administer government in the 15.62-square mile city.
Over the years, discussions came about relating to the city solving its pension debt dilemma. As it turned out, however, the city’s elected leadership – the city council – proved collectively unwilling to engage in a course of pension reform which would consist of having the city’s retirees surrender the increases to the generous pension allotments they were given as a consequence of the deal their unions had brokered on their behalf during contract negotiations with Quincey over a decade ago. Instead, the council, advised by then-City Manager Rosemary Hoerning, who stood to receive an annual pension at or exceeding $200,000 upon retirement, and Assistant City Manager Steven Parker, who will likely pull an annual pension approaching $200,000 per year upon his retirement, as well as by the city’s consultant, Julio Morales, whose company, Urban Futures, stood to make more than $60,000 in further fees if the city elected to issue pension obligation bonds, decided to utilize a strategy of issuing pension obligation bonds to pay down the city’s pension debt.
The city council gravitated to the pension obligation bond panacea despite the lack of enthusiasm most conservative financial advisors have for such financial instruments, which are intended to retire the debt represented by yet unpaid pensions to retirees by creating further debt. The Government Finance Officers’ Association, likening pension obligation bonds to paying off the money owed on one credit card with another credit card, has sternly warned municipal entities that pension obligation bonds place taxpayer money at risk and often leave governments saddled with more debt rather than less, as they often do not achieve a high enough return to justify their use.
Setting that warning aside, the city stealthily moved toward borrowing its way out of its pension crisis by making the issuance of $121 million in bonds.
On April 28 of this year, the city hired Urban Futures, which had advised it to issue the bonds, as the city’s bond issuance consultant, guaranteeing the company $62,500 upon the issuance of the bonds. On May 10, the city quietly retained the law firm of Best Best & Krieger, of which City Attorney Steve Deitsch is a partner, to serve as the validation counsel and bond counsel for the bond issuance.
The same day, May 10, the city equally quietly retained the law firm of Straddling Yocca, Carson & Rauth to serve as the disclosure counsel for the bond issuance.
On July 21, in a lawsuit designated CIVSB2121939 by the San Bernardino County Superior Court and titled City of Upland v. 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, the City of Upland sued its 77,754 residents by means of a validation complaint, challenging them to come forward within 30 days of being served with notice of the lawsuit with reasons why the city should not issue $121 million in pension obligation bonds.
By filing the validation lawsuit against its residents, the city was seeking to get around the requirement that any taxes to be imposed on citizens or any bond issuance to be defrayed by taxpayers had to be approved by a majority vote of those upon whom the tax is to be imposed. The filing of the lawsuit created a loophole in that law, such that if no one responded to the lawsuit within 30 days, then the bonds could be issued without a vote being made.
Late in July an eagle-eyed Upland resident spotted the recordation of the validation complaint on the San Bernardino County Superior Court’s website, and word spread among a small circle of Upland residents that the city had filed suit against all of its residents.
On August 9, the city secured the services of J.P. Morgan Securities LLC as the managing underwriter of the bonds and Stifel, Nicolaus & Company, Incorporated as the co-managing underwriter for the proposed pension obligation bond issuance.
On Thursday August 12, the city quietly filed with the court for its approval of the language for a proposed summons naming no single individual but a collective, that being “all persons.”
“You are being sued,” the summons to participate in the validation process read in part. “You have 30 calendar days after this summons and legal papers are served on you to file a written response.”
Thereafter, inquiries with regard to the legal action were made with City Hall, prompting some curious doublespeak from then-acting City Manager Parker on August 18. “To be clear, the city has not directly or even indirectly sued its constituents,” Parker asserted. “No action is being taken against any individual, constituent or not, and at the end of the day, there will not be any judgment or adverse action taken against any individual because of the validation action.”
The city then utilized the Inland Valley Daily Bulletin to serve its 77,754 residents notice of the lawsuit with a legal advertisement that first ran on September 9, 2021. Despite requests that it do so, the city refused to post the legal notice on its website to ensure greater resident awareness that the suit was under way.
The city’s plan ran into the stiffest of headwinds, however, when on September 21, with a mere 18 days to go before the city would have been free to initiate the issuance of the bonds, the Howard Jarvis Taxpayers Association, which had a perfect record of success in opposing four other California cities in their efforts to issue pension obligation bonds without first obtaining voter approval to do so, filed a response to the city’s validation complaint on behalf of Upland residents.
The Howard Jarvis Taxpayers Association, on behalf of its members residing in the Upland community, and represented by its president, Jonathan Coupal, who is an attorney, and two of its staff attorneys, Timothy Bittle and Laura Dougherty, two days later followed that answer to the validation complaint up with a court filing also served upon the City of Upland making a first request for the production of documents relating to the case and a first set of special interrogatories. This sent a clear signal to the council that its effort to sneak the validation procedure past Upland’s unsuspecting residents was not going to work. At its September 27 and October 11 meetings, the city council discussed the validation suit during closed sessions held outside the scrutiny and earshot of the public.
On October 15, Scott Ditfurth, the attorney with Best Best & Krieger representing the city in the validation action, filed a motion with the court to dismiss the entire case and all of its causes of action. Thereupon, Judge Lynn Poncin, who was hearing the matter, entered a dismissal of the complaint without prejudice before trial.
Unbeknownst to and unappreciated by the city council, Parker and Deitsch was that the Howard Jarvis Taxpayer Association had been brought into the case in large measure because of the manner in which the council, Parker and Deitsch had sought to secretively effectuate the bond issuance and then prevaricated about the lawsuit the city had filed against its own residents to achieve that goal.
At its October 25 meeting, City Attorney Steven Deitsch publicly announced that the city was giving up on its effort to issue pension obligation bonds, simultaneously seeking to cast the effort to issue the bonds in a benign light.
“The issuance of the bonds would allow the city to satisfy at least part of its current obligation to the Public Employees’ Retirement System by issuing pension obligation bonds at a lower interest rate than the Public Employees’ Retirement System obligation now carries and is expected to carry into future years, and then the city would use bond proceeds to satisfy the Public Employees’ Retirement System obligation,” Deitsch said. “It should be noted that other cities in California have successfully issued such pension obligation bonds, and have done so following successful completion of a validation action in court similar to the one filed by the City of Upland.”
As a result of the Howard Jarvis Taxpayers Association action, Deitsch said, “the city has decided not to pursue the validation action and has dismissed the validation complaint. So, now the city will consider alternative financing approaches to address the city’s existing pension obligations.”
Word now comes that the city is again seeking to utilize bond financing to generate revenue to make multi-year stopgap funding of the ongoing and future pension debt, such that the inevitable financial burden of paying off the debt created by the issuance and sale of the bonds to be used to generate the funds to make the pension payments will not come for another 20 to 30 years, well after anyone on the council now or currently employed in management at the city will have to answer for having created that debt.
In this case, the city appears to be attempting to utilize the legally questionable strategy of issuing money for what is ostensibly one purpose – the creation of infrastructure for the city’s water department which delivers water to domestic and business users – and utilizing the proceeds from the bonds for something else altogether, in this case servicing the city’s pension debt.
On the agenda for the city council’s December 13 meeting, that being next Monday night, is an item calling for the council to “approve actions related to the blast strategy to pay down city’s unfunded accrued liability (pension liability).”
According to Parker, who has returned to his former position as assistant city manager and finance director now that Michael Blay has been hired to serve as Rosemary Hoerning’s successor as city manager, what he termed a “proposed blast strategy for reducing the city’s unfunded accrued liability with the California Public Employees’ Retirement System “consists of the council agreeing to “authorizing the transfer of $10 million from the city’s Section 115 Pension Trust to make an additional discretionary payment to the California Public Employees’ Retirement System” and “authorizing an additional discretionary payment from the city’s enterprise funds to pay off their current share of the city’s unfunded actuarial liability.”
The city’s enterprise funds extend to the money generated by the city’s provision of services to residents and businesses, such as the money the city takes in with the water department’s provision of water to households and businesses.
The blast strategy further consists of, according to Parker “approving a revised pension funding policy,” together with “a revised investment policy.” Thereafter, according to Parker’s game plan, the city is to “to assemble the financing team, and prepare related legal documents for subsequent council approval of the issuance of the 2022 water bonds” to be augmented with city staff taking measures “to prepare the necessary legal documents for an internal general fund lease revenue bond issue (sale) for purchase by the water and sewer funds.”
Legal experts say the plan as being hatched by Parker entails some risk, as funds in the city’s water department accounts must remain sequestered and cannot, under California law, be utilized for anything other than water operations or providing capital improvements for the drafting of, storage of, distribution of, or improving the quality of water. Using that money to pay for pensions or any other purpose would run, those attorneys say, afoul of the law.
-Mark Gutglueck