Originally posted at CalPensions.
By Ed Mendel.

The Vallejo city council last week voted to close a $5.2 million gap in the current budget, showing no alarm that in a five-year forecast the gap reopens, mainly driven by rising pension costs.

Moody’s, a Wall Street credit rating agency, said in a report last month that Vallejo and two California cities currently in bankruptcy, Stockton and San Bernardino, risk returning to insolvency without pension relief.

Vallejo emerged from a 3½-year bankruptcy in November 2011 mostly with negotiated cuts. Only one labor contract was overturned. City officials said they considered cutting pensions, the biggest debt, but did not try after CalPERS threatened a costly and lengthy legal battle.

Mayor Osby Davis, the lone council member remaining from the bankruptcy vote nearly six years go, told his colleagues after the budget vote last week that the city continues to face difficult decisions in the long drive toward a “balanced and sustainable” budget.

“We are doing everything we can to try to make the ends meet,” Davis said. “It’s going to be a tough struggle, but I’m sure we will get there.”

Later in the week the city finance officer, Deborah Lauchner, who has the task of proposing budget solutions, shared the mayor’s confidence that the Vallejo financial problems can be managed.

“We are not on the brink of bankruptcy,” Lauchner said. “We are not going there.”

Vallejo has pursued a policy of deep cuts, sharply reducing police and closing several fire stations, while paying down some future debt and building reserves. Importantly, voters approved a 1-cent sales tax increase in November 2011 yielding $12 million a year.

The $5.2 million general fund gap was a “placeholder” intended to be filled by labor cuts. And much of the gap was closed when the city imposed a retiree health cut on police and negotiated a similar cut with managers, a $300 a month cap shared by other unions.

While San Bernardino skipped its CalPERS payment last year, owing about $17 million, Vallejo went the other way, making a $6.6 million supplemental payment to the California Public Employees Retirement System after emerging from bankruptcy.

Vallejo joined the CalPERS retiree health pre-funding program last December. In the five-year budget forecast, the city spends $3.2 million a year on retiree health during the period, two-thirds covering annual costs and a third for pre-funding to invest and help cover future costs.

The forecast shows the general fund CalPERS payment, $13.8 million this year, increasing to $18.7 million in fiscal 2018, up about 36 percent. Lauchner said the projection includes all three recent CalPERS rate hikes: earnings forecast, actuarial method and longevity.

The general fund budget gap is projected to reopen, $1.9 million in fiscal 2015, and grow to $6.7 million in fiscal 2018. At the same time, the general fund reserve, $7.6 million this year, is projected to grow to $11.6 million in fiscal 2018, 14 percent of the general fund.

In its drive toward a sustainable budget, Lauchner said, the city wants to have a 15 percent reserve, near the 17 percent recommended by the National Government Finance Officers Association. But if necessary, the projected reserve could cover the projected gap.

Last December a fact-finding panel reported that the police union, saying officers took deep pay cuts while sworn positions fell from 145 to 80, argued that the city is now fiscally sound and improving with more property and sales tax revenue from an improving economy.

“While it maintains a budget deficit,” the panel said the police union argued, “in reality, the city has experienced — and will continue to experience — annual budget surpluses as it continues to overstate expected expenditures (e.g., by budgeting for 106 officers when it will not exceed 90 sworn officers under optimal circumstances) and conservatively projecting revenues.”

All three bankruptcy cities have the top CalPERS police-firefighter formula, “3 at 50,” or 3 percent of final pay for each year served at age 50. These “safety” workers do not get Social Security in addition to pensions, unlike most government workers.

Recent Vallejo retirees have the most generous pensions among the three cities, the latest CalPERS actuarial valuations show as of June 30, 2012. Some past Vallejo salary negotiations have been based on pay in wealthier Bay Area cities.

For safety workers retired under five years, the average Vallejo pension was $101,867 (52 retirees), the average Stockton pension $92,300 (110 retirees), and the average San Bernardino pension $75,455 (81 retirees).

For the other or “miscellaneous” workers retired under five years, the average Vallejo pension was $32,819 (146 retirees), the average Stockton pension $30,650 (419 retirees), and the average San Bernardino pension $23,867 (322 retirees).

When labor unions and other defenders of public pensions cite relatively low average pensions, critics say the average is skewed low by retirees who only worked for a brief period of time and others who have been retired for a long time.

The reports show how pensions have increased over the decades. For Vallejo safety workers, the average pension for those retired 25-29 years was $33,342 (five retirees), retired 10-14 years $71,354 (11) and under five years $101,867 (52).

As the stock market soared during a high-tech boom and gave pension funds a surplus, CalPERS sponsored legislation, SB 400 in 1999, authorizing the “3 at 50” formula for local government labor bargaining, sharply increasing pensions.

Since a deep recession and stock market crash in 2008 punched a huge hole in pension investment funds, CalPERS rates have nearly doubled for local government employers like Vallejo and, in the future, will go even higher.

The CalPERS rate for Vallejo safety workers went from 28.1 percent of pay in fiscal 2008-09 to 50.8 percent in 2014-15 and is projected (before the longevity increase) to be 65.5 percent in 2019-20.

For Vallejo miscellaneous workers, the CalPERS rate was 16.8 percent of pay in fiscal 2008-09, climbed to 30.2 percent for fiscal 2014-15 and is projected (before the longevity increase) to be 38.9 percent in fiscal 2019-20.

As of June 30, 2012, the Vallejo safety fund had 60.9 percent of the projected market value assets needed to pay for pensions over the next three decades, 73 percent using the actuarial value of assets. The miscellaneous funding levels: 60.6 and 72.6.

Like Vallejo, Stockton did not try to cut pensions in bankruptcy, but cited a different reason. Instead of a costly CalPERS court battle, Stockton said pensions are needed to compete in the job marketplace.

Stockton has eliminated retiree health care and negotiated agreements with all major creditors except Franklin. The original date to confirm an exit plan or hold a trial, March 5, was moved to May 12. A status hearing is scheduled Wednesday, March 19.

The Moody’s report last month said that San Bernardino, which CalPERS says owes $17 million for skipped payments, faces “an uphill battle” if it tries to force pension cuts in bankruptcy.

A federal judge ruled bankrupt Detroit can cut its pensions because they are a contract, routinely cut in bankruptcies. But CalPERS, not relying on a contract argument, says its an arm of the state, and a bankruptcy court cannot interfere with the state-local government relationship.

Last week a public statement was authorized by the retired federal bankruptcy judge, Gregg Zive, handling closed-door mediation between San Bernardino and its creditors, the San Bernardino Sunreported.

“Significant and substantial progress has been made as a result of extended and good faith negotiations between the city and CalPERS, and such progress lays the foundation for negotiations between the city and other parties,” said the statement filed by the city. “Negotiations with other parties are still required and there will be a lot of hard work to be done by those parties.”