Wednesday, October 31, 2012

Straight Outta Compton?

Dale Kasler of the Sacramento Bee reports, CalPERS sues Compton over missed payments:
A second California city has fallen behind on its payments to CalPERS, prompting a lawsuit by the big pension fund.

Compton owes $2.7 million to the California Public Employees' Retirement System, the pension fund said Monday.

CalPERS sued the city in Sacramento Superior Court after Compton failed to make its required payments for September.

Harold Duffey, the city manager, said Monday that Compton is experiencing a short-term cash-flow problem and expects to clear up the debt before the end of the year.

Compton has been facing significant financial problems and publicly flirted with a bankruptcy filing over the summer.

Still, Compton's troubles represent yet another challenge to CalPERS and the durability of public pensions in general, as cities cope with severe revenue shortfalls.

San Bernardino, which filed for bankruptcy protection in August, is $5.2 million behind on its payments to CalPERS.

The fund has tried to get the bankruptcy case tossed out, saying the city is using the bankruptcy law unfairly to get out of paying its bills.

In Stockton, another city in bankruptcy protection, two creditors are trying to keep the city from paying its CalPERS bills. The creditors, a pair of bond-insurance companies which are owed millions, say their claim shouldn't take a back seat to CalPERS.

Skipping payments to CalPERS, the nation's largest public pension fund, was once considered unthinkable. Vallejo considered scaling back its pension benefits after its bankruptcy filing in 2008 but backed off after getting a warning from CalPERS.

Duffey said Compton submitted a payment plan to CalPERS, promising to "catch up in December." But the pension fund filed the court case anyway.

"Contributions are required by law and if they're not paid, we do intend to pursue all obligations," said CalPERS spokeswoman Amy Norris.

The unpaid bills include payments for pensions and health insurance, she said.
Last week, I discussed the San Bernardino pension showdown and stated:
Keep an eye on this case because it could mark an important turning point for all US public pension plans. As the private sector looks to offload pension risk to insurers or offer lump-sum payouts to thousands of retirees, municipal bankruptcy might be used as a tool to 'restructure' all debts, including pension debt.
As creditors and public pension funds fight for what is due to them, this could get very messy, forcing courts to decide if stressed cities can scrap obligations to retirement plans:
So what happens if California cities facing fiscal emergencies stop paying into their employees' pension funds? We all could find out soon.

CalPensions.com, an online news site, reported that "CalPERS filed court actions against two financially troubled cities, San Bernardino and Compton, after they stopped making legally required payments to the big pension fund, a rare default not made in the Stockton and Vallejo bankruptcies." CalPERS is the California Public Employees Retirement System, the nation's largest public pension program.

The city of San Bernardino filed for bankruptcy protection Aug. 1 and has skipped $5.3 million in pension payments to CalPERS. Compton, in Los Angeles County, has been considering bankruptcy. It made partial payments to CalPERS, but was left owing about $2.7 million. Stockton, which sought bankruptcy protection in June, and Vallejo, which exited bankruptcy last year, made their pension payments.

Most pension experts cite California court decisions mandating that pension contracts with public employees must be honored. "But you can't pay if you don't have any money," Mark Cabaniss told us; he's an attorney from Kelseyville who has written on pensions for the CalWatchdog.com journalism site. "In theory, a judge can order [cities] to pay. But what happens after that? I don't know."

He said that the question really isn't one of contracts. "These aren't really legal questions; they're political," he said. "When things go belly-up, the cases will go to the California Supreme Court. Will the court then say the cities can cut the pensions? Or will the cities have to fire every single employee? Obviously, you will have to keep enough police on to keep the peace in the cities, as well as some other employees."

But how many police and other employees? Mr. Cabaniss said the problem then could become having the courts micromanaging city budgets. Courts have taken similar steps, for example, with prison conditions in California. And courts even sometimes have ordered tax increases.

According to a summary in the Claremont Review of Books, "Between 1985 and 2003, federal judges ordered more than $2 billion in new spending by the [Kansas City, Mo.] school district to encourage desegregation. Not only did they double property taxes to pay this huge bill, but they imposed an income tax surcharge on everyone who lived or worked in the city. ... [The] judicial effort to improve Kansas City schools was a dismal failure."

The Kansas City case is infamous because judges were shown, if they didn't know it already, that they don't do well acting as legislators.

Mr. Cabaniss pointed out that California's constitutional tax limitation measures, which require two-thirds approval of local voters for tax increases, might preclude such a state court decision. We would add, on the other hand, that judges in the California court system receive state pensions and might not want to set a precedent that could reduce their own retirement benefits.

Yet another consideration is that, unlike federal judges, such as those overseeing the California prisons and Kansas City schools, who enjoy lifetime positions, California Supreme Court justices are subject to periodic approval by voters, and can be recalled. Most famously, in 1986, Chief Justice Rose Elizabeth Bird and two associate justices were removed by voters for obstructing the implementation of the death penalty.

Mr. Cabaniss also pointed us to a recent article by Amy B. Monahan, a professor at the University of Minnesota Law School, in the Iowa Law Review. As the article abstract put it, "This Article demonstrates that by holding that benefits not yet earned are contractually protected, without explaining the basis for finding that such a contract exists, California courts have improperly infringed on legislative power and have fashioned a rule that is inconsistent with both contract and economic theory."

We have been warning for a dozen years that a public pension crisis would strike California because the public employee unions prevailed upon the state Legislature and local governments to substantially boost retirement benefits. Now, the crisis is upon us.
The crisis is upon us and like a malignant cancer, it will spread throughout the United States, pitting public pension funds against cities and municipalities and their creditors, which include bond insurers.

And it's not the gangsters in Compton but the banksters on Wall Street that worry me. They're back at it today after markets closed for two days because of severe weather. Cleaning up the mess from Hurricane Sandy will take weeks and months in some neighborhoods. Cleaning up the pension mess will take years and might never be cleaned up, leaving cash-strapped cities like Compton and San Bernardino in dire straights.