Local Government
CalPERS Seeks Legislation to Avoid Pension Cuts

CalPERS Seeks Legislation to Avoid Pension Cuts

CalPERS wants unions and local government groups to come up with legislation that would retroactively correct a mistake that could lead to more pension cuts, like the 63 percent reduction last July in pensions promised about 200 former employees of LA Works.

The mistake was that CalPERS contracted to provide long-term pensions for an employer that only had short-term contracts — no other revenue, not even shared pension liability with another government agency that can impose fees or taxes.

LA Works, a job-training agency formally known as the East San Gabriel Valley Human Services Consortium, was a joint powers authority formed by four cities: Azusa, Covina, Glendora, and West Covina.

When auditors found $1 million in overbilling, Los Angeles County supervisers rejected LA Works’ bid for a new six-year $32 million contract. The East San Gabriel Valley consortium closed in June 2014 and hired a consultant to wind down the operation.

The founding cities, saying they had no legal obligation, declined to pay the $19.4 million termination fee CalPERS wanted to fully fund the pensions. After calculating the East San Gabriel investment fund shortfall, CalPERS made the 63 percent cut to close the funding gap.

In 2015 East San Gabriel had two top annual pensions, $120,777 and $100,240, followed by a sharp drop to more modest pensions ranging from $51,919 to $1,738, according to Transparent California.

The deep pension cuts are still an open wound. (See “It could happen to you” in the comments section of a recent Calpensions post.) There has been no sign of a legal challenge from the former East San Gabriel employees, which would be costly.

CalPERS has contracts with 162 joint power authorities, the board was told last month, and 149 of the contracts have been reviewed so far. Only 10 were listed as having financial liability that reverted back to the member agencies.

“This is great data on it and appreciated,” Richard Costigan, finance committee chairman, told Arnita Paige, pension contract chief. “It seems to be even larger than we thought it was.”

To address the East San Gabriel issue, Costigan asked that future reports break out the joint power authorities that only have contract revenue, not independent revenue like pollution control and mosquito abatement districts.

In November, the committee was told that CalPERS is working with unions and employer groups on a legislative solution for joint powers authorities that, like East San Gabriel, do not have shared liability for pension obligations.

“We have been looking at how that might be able to be applied in the legislative fix retroactively,” said Brad Pacheco, CalPERS deputy executive officer for communications.

Agreeing that the “last thing we want to do is have another East San Gabriel,” Dane Hutchings of the League of California Cities told the committee the four cities that formed the joint powers authority were not the only players in the pension cuts.

“It was also CalPERS who played a role in this situation as well by allowing such contract to be approved and benefits to be paid when the sole source of funding was federal grant funds,” Hutchings said.

Excerpt from ESGVC retirees letter to CalPERS

What a letter from East San Gabriel employees last year called “our only hope,” if the four cities did not pay the pension debt, would be eliminated by a second legislative bill planned by CalPERS.

In limited situations, the CalPERS board is authorized by state law to put the employees of a terminated pension plan into a pool and continue to pay their full pensions, even if the employer did not pay off the pension debt.

The Terminated Agency Risk Pool has a surplus, 213 percent funded with $250 million in assets as of June 30, 2016. Members from 98 plans were in the pool, which was paying an average annual pension of $7,671 to 718 retirees and beneficiaries.

But there was little chance that the East San Gabriel members would go into the pool without a pension cut. Low CalPERS funding (68 percent last year) has persisted for a decade. Employer rates scheduled to continue rising until 2024 are straining local government budgets.

When a plan terminates, there is no way to get more money from the employer. So CalPERS charges a termination fee intended, with investment earnings, to cover all of the future pension costs of members going into the pool.

In a controversial change in 2011, CalPERS stopped using its regular earnings forecast, now 7 percent, to discount future pension costs for the termination fee and switched to a risk-free bond rate, 2.4 percent recently.

The termination fee ballooned. Several small cities considering leaving CalPERS, among them Villa Park and Canyon Lake, decided to stay after seeing the size of the termination fee. The judge in the Stockton bankruptcy called the termination fee a “poison pill.”

In addition to eliminating the option of paying full pensions when the debt is not paid, the second CalPERS bill would streamline the voluntary termination period from 100 to 90 days and require employers to give written notice to current and former employees within seven days.

“We don’t necessarily track where all the employees go after they are done with employment,” Dillon Gibbons of the California Special Districts Association told the CalPERS board in November. “So I think it would be wise for CalPERS to also notify the employees.”

A wave of pension cuts began in November 2016 after a tiny Sierra town, Loyalton, terminated its CalSTRS contract and did not pay a $1.7 million fee. The pensions of five former employees were cut 60 percent. The city began payments to retirees to replace the cuts.

After the East San Gabriel pension cuts in July, CalPERS last month made a 68.6 percent cut in the pensions of two Trinity County Waterworks retirees. Three other Trinity employees are eligible for pensions in the future.

The district in the town of Hayfork in northwestern California is replacing the pension cuts made after a $1.5 million termination fee was not paid. Craig Hair, district manager, said he is trying to get a “more equitable” cut for an employee with several CalPERS employers.

This month CalPERS made a 92.5 percent cut in the pension of one Niland Sanitation District retiree. His annual pension was $6,144. Niland has three other vested but inactive employees and one member with a lower pension under a reform effective Jan. 1, 2013.

The small Herald Fire Protection District in southern Sacramento County filed to leave CalPERS in January last year because pension costs were becoming unaffordable. Some feared that a termination fee of $400,000 could push the district into bankruptcy.

CalPERS said it sent Herald a termination fee of $404,535 on Nov. 30. Payment was due last week on Saturday (Jan. 20).

“To date, we have not received their payment,” Amy Morgan, CalPERS spokeswoman, said Friday. “If we have not received the payment by Monday (Jan. 22), CalPERS will issue a final collection notice to the agency and notify all affected participants, while continuing to work with the District to ensure payment within the next 40 days.”

Originally posted at Cal Pensions.

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