Bankrupt San Bernardino announced an agreement with CalPERS last week to pay off an unprecedented pension debt owed for skipping payments to the pension fund for a year — $13.5 million, plus several million more in penalties and interest.

Details of the agreement reached in closed mediation were not released. But the city said in a court filing the CalPERS agreement “will help form the basis” for a debt-cutting plan needed to exit bankruptcy.

Whether the city’s “interim agreement” with CalPERS means the city’s debt-cutting “plan of adjustment” to exit bankruptcy will exclude pensions is not revealed in the court filing.

San Bernardino has not publicly proposed a pension cut. A sketchy plan for operating in bankruptcy only proposed a “fresh start” that would “reamortize CalPERS liability over 30 years,” perhaps cutting costs $1.3 million in the first year.

Last week, an attorney for San Bernardino emphasized the importance of the city’s relationship with the pension system during his opening remarks at a status hearing with U.S. Bankruptcy Judge Meredith Jury.

“The importance of this agreement to mediation and the case cannot be overstated because of the size of the CalPERS claim, the importance of CalPERS and its relationship to the city and because the city believes based on discussions with unions and retirees that sustaining their relationship with CalPERS is very important,” said Paul Glassman, the San Bernardino Sun reported.

The cash-short city’s decision to skip employer payments to CalPERS, after an emergency bankruptcy filing in August 2012, would be grounds for termination of its CalPERS contract, if the city was not in bankruptcy. The city resumed payments last July.

CalPERS responded by attempting to sue San Bernardino for payment in state court. The federal bankruptcy judge blocked the attempt, saying employee pay would be threatened and the ability to reorganize in bankruptcy undercut.
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Then CalPERS opposed San Bernardino’s eligibility for bankruptcy, followed by an appeal when the judge ruled the city eligible. The agreement announced last week delays action on the appeal.

CalPERS also filed a brief in support of an appeal by the state Department of Finance and the state Controller of the bankruptcy judge’s ruling protecting $15 million in city tax revenue.

The judge blocked a state attempt to withhold $15 million in San Bernardino sales and property tax revenue. The state said the city had not returned a similar amount of unspent housing funds after the state shut down local redevelopment agencies.

Unlike San Bernardino, Vallejo and Stockton continued to make their full CalPERS payments after filing for bankruptcy. The unprecedented San Bernardino lapse in payments was mentioned as CalPERS took several protective steps.

In a move said to be already under way due to low interest rates, CalPERS lowered the earnings forecast for terminated plans from 4.82 percent a year to 2.98 percent, sharply increasing the debt that must be paid if employers leave the system.

In April last year, the CalPERS board approved a staff proposal to sponsor legislation that would “provide CalPERS with a present lien on all assets of a contracting public agency in the amount of all obligations owed to the system.”

After concluding negotiations with CalPERS, the court filing last week said San Bernardino officials are “now fully engaged” in negotiations with two holdout unions, police and firefighters.

An agreement reportedly may be near with police. But firefighters, worried the city may plan to contract for fire services, filed a request last week to be released from court-ordered mediation, saying talks with the city were stalemated.

The city filing said San Bernardino plans to ask the judge for authorization to impose a “last, best and final offer” if unions do not agree to new cost-cutting contracts when negotiation procedures are completed, probably by the end of August or sooner.

The San Bernardino City Council is scheduled to adopt a new budget today (June 23). To make the spending plan balance, deep spending cuts are said to be needed in addition to the debt deferrals allowed in bankruptcy.

“Since employee compensation represents approximately 75 percent of the city’s costs, many of the cost reductions inevitably are labor related,” said the court filing.

The city’s financial advisor, Michael Busch of Urban Futures, argued at the hearing last week that the city needs to cut employee pay to survive, the San Bernardino Sun reported.

“He divided firefighters’ compensation into three categories of 40 firefighters each,” the Sun said. “The top 40 average $197,000 per year, the middle $166,000 and the bottom-third $130,000 per year.”

The firefighters union, which has talked with the city outside of the closed mediation, did not mention pension cuts while listing the spending reductions sought by the city.

“The city is currently trying to eliminate from the City Charter those provisions that provide the salary formula for public safety and that protect the very existence of the City of San Bernardino’s Fire Department,” said the firefighters court filing.

“The city is also moving forward with (1) the closing of at least two, and as many as four, fire stations; (2) the elimination of between four six pieces of apparatus; and (3) the reduction of personnel associated with these cuts.

“The city is looking at changing work schedules and/or contracting out Fire Department services to other public and/or private entities.”

An unusual city charter provision, “section 186,” links the pay of San Bernardino police and firefighters to the average pay in 10 other cities, most much wealthier. Due to the link, police havetwice received pay raises costing $1 million during the bankruptcy.

A citizens charter review committee appointed by the city council recommended, after several public hearings, that Section 186 be replaced with collective bargaining. The city council is expected to put the measure on the November ballot.

Stockton, which filed a month before San Bernardino, theoretically could be approved to exit bankruptcy as soon as a hearing July 8. The judge may be considering a separate ruling to clarify whether CalPERS pensions can be cut in bankruptcy like other debt.

In Detroit, a federal bankruptcy judge has ruled that the city’s pensions can be cut. Michigan Gov. Rick Snyder signed legislation Friday for a “grand bargain” providing state and foundation money to ease pension cuts retirees are being asked to approve.

In a plan negotiated with unions, active Detroit workers will be switched to a “hybrid plan” that combines a smaller pension with a 401(k)-style individual investment plan.

“Trading down to a less generous pension plan is often said to be a legal nonstarter for government workers, so if Detroit succeeds, its hybrid could become a model for other distressed governments from Main to California,” a page-one story in the New York Times said last week.

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Originally posted at CalPensions.