Bankrupt San Bernardino approved a plan last week to disband the city fire department and annex the city to a large county fire district. Part of the expected savings is $2.7 million a year from avoiding future CalPERS rate increases.
City firefighters now in CalPERS would be transferred to the San Benardino County Employees Retirement System. And the county system is said to face lower rate increases, because it has more quickly paid down pension debt.
Getting CalPERS-related savings would be a welcome change for the struggling city.
After an emergency bankruptcy filing in August 2012, San Bernardino skipped its California Public Employees Retirement System payments until the following July, saying it was in danger of not making payroll.
The unprecedented failure to make payments required by law gave CalPERS grounds to terminate its contract with the city. But CalPERS opted for an all-out legal battle occupying much of the first two years of the San Bernardino bankruptcy.
A sketchy city operating plan in 2012 proposed a “fresh start” that would “reamortize CalPERS liability over 30 years,” perhaps in a way that would “realize value of $1.3 million per year starting fiscal year 2014.”
What emerged from mediation in June last year was a San Bernardino agreement to repay the $13.5 million skipped payment with interest and penalties. A $1.5 million payment in May last year is being followed by monthly payments of $602,580 for two years.
The interest in the payment totaling $16 million is based on the CalPERS investment earnings forecast, 7.5 percent. When the city plan to exit bankruptcy is approved or denied, the city will pay a $2 million penalty in five annual installments.
Now a key part of the San Bernardino recovery plan is outsourcing fire services, approved by the city council on a 4-to-3 vote last week. Moving fire services to the county includes a property parcel tax increase of $143 a year.
Opposition came from opponents of the parcel tax and supporters of a fire department established in 1878. Unlike other unions, firefighters did not agree to a 10 percent pay cut and to forego merit raises, instead filing several lawsuits against the city.
Paul Glassman, the city’s bankruptcy attorney, warned the council that rejection of the outsourcing plan could lead to U.S. Bankruptcy Judge Meredith Jury and creditors losing confidence in the will of the city to make difficult decisions needed for recovery.
“This in turn could jeopardize the city’s plan of (debt) adjustment and could lead to dismissal of the bankruptcy case and loss of the protection from creditor lawsuits and seizure of assets,” Glassman said. “This would have a catastrophic effect on the city such that it could not continue as a viable ongoing entity.”
The San Bernardino County Fire Department, with 930 employees and 56 fire stations, serves the unincorporated area and seven cities including Fontana, a San Bernardino neighbor with nearly as much population, 203,000 compared to 213,000.
The county would take over the 10 current San Bernardino fire stations and offer similar jobs to all of the 100 or more city firefighters and possibly most support personnel. Firefighters on duty at all times, 41, would be more than current staffing, 38.
Annual fire service costs would be lower. But more importantly, the $143 parcel tax increase would reduce the allocation of city property tax needed for fire services, yielding $7 million or more of the new city revenue called for in the recovery plan.
“You’re not solvent now,” Andrew Belknap of Managing Partners consultants reminded the council as he presented the plan to outsource fire services. “This would be an $11 million contribution to solvency.”
Few details about how $2.7 million in pension costs would be saved, or how the pension savings fit into the city budget forecasts, were in theagenda packet for the council meeting last week.
“Annexing to County Fire for fire services will save the City an additional estimated $2,700,000 per year in pension costs, based on a recent actuarial analysis provided by a separate consultant to the City,” said a Citygate consultant report.
Mayor Carey Davis, puzzled about the $2.7 million pension savings, asked Stewart Gary of Citygate for an explanation. He later raised the issue with Belknap and later still with Michael Busch of Urban Futures Inc. consultants.
“Maybe I’ll understand it for the third time,” Davis told Busch.
A final explanation of the $2.7 million pension savings was volunteered by Gregory Devereaux, San Bernardino County chief executive officer, who prefaced his remarks with the hope that he would not be adding to the confusion.
“Part of the savings that we are discussing is avoided cost,” he said. “You heard much earlier in the evening that SBCERA absorbed the shortfall for the deficiency much more quickly than PERS.
“What’s going to happen in PERS over the next few years are significant rate increases. So the savings that is being discussed is the difference between if you stay in PERS with city fire, you’re PERS rates are going to go up at a much more rapid rate than the SBCERA rates.”
In the latest reports, the CalPERS San Bernardino safety plan for police and firefighters had 73 percent of the projected assets needed to fund future pension obligations. SBCERA was 80 percent funded.
The report for the CalPERS San Bernardino safety plan, which is for the year ending June 30, 2013, shows the employer rate was 23 percent of pay in 2010, set at 38.8 percent of pay for this fiscal year, and is estimated to increase to 49.3 percent by 2020-21.
If firefighters withdraw from the CalPERS safety plan, Busch said, the city will over time pay off their share of the plan’s “unfunded liability,” about $2.3 million. This “legacy cost” is included in the estimate of $2.7 million in pension savings.
Gov. Brown signed a bill last month, AB 868, that some think enables transfers of employees from CalPERS to county retirement systems. Belknap said the transfer also can be done through existing “reciprocity” agreements.
“These transactions are not that uncommon,” he said. “This happens with some regularity. So we know how to do it.”
The consultants and the city manager, Alan Parker, did not recommend a bid for fire services from a private firm, Centerra, citing uncertainty about mutual aid agreements with neighboring fire departments and lack of experience with large service areas.
The council vote authorized staff to negotiate the terms of annexation with the county and the county fire district as well as an interim contract for county fire services. Both would be brought back to the council for approval.
An annexation agreement will need the approval of the Local Agency Formation Commission. The city hopes to be annexed into the county fire district by next July. Waste management and other city services also would be outsourced under the recovery plan.