« Google Spy Drones For Street View? | Main | Europe‚Äôs Stark Choice: Resignation or Revolution »

Public Pension Plans To Share The Pain

Contributed by Chriss Street. Specialist in corporate reorganizations and turnarounds, former Chairman of two NYSE listed companies. His latest book, The Third Way, describes how to achieve management excellence and financial reward by moving organizations from Conflict and Confrontation to Leadership and Cooperation. He lives in Newport Beach, CA.

US Bankruptcy Judge Christopher Klein ruled in the Stockton, California, municipal bankruptcy case that public employee pension obligations are nothing more than a “garden variety creditor”. This must have felt about the same to unions as what conservatives felt when Barrack Obama, after winning the Presidency in 2008, said: “At this defining moment, change has come to America.” At this defining moment, payments for all California public employee pensions are now at risk. 

Prior to the Stockton ruling, Calpensions, the popular website for participants in California Public Employees’ Retirement System (CalPERS), California State Teachers Retirement System and other government pensions reassured their followers:  

“As the Public pension benefits offered on the date of hire are widely believed to be “vested” rights, protected under contract law by a series of state court decisions, that can only be cut if offset by a new benefit of equal value.”

In Orange County in 1994 and Vallejo in 2007, the largest municipal bankruptcies in California before Stockton, no other creditors challenged continuing to pay pensions. When Orange County cut its work force by 22%, few noticed any reduction in services and the County eventually paid off creditors at 100%. But Vallejo cut their work force by over 50%; and some unsecured creditors were only paid 5% of what they were owed. In both cases, pension contributions and retiree payments were never put at risk.

CalPERS is listed on the City of Stockton schedule of creditors as owed $800 million. But this number assumes that the city continues to make timely pension contributions at an exorbitant level for the next 30 years, and that CalPERS earns a 7.5% compounded rate of return without any losses. Most academics, including your author, believe public sector expected investment return estimates are set ludicrously high to give politicians the cover story to justify inflating benefits and minimizing pension contribution costs.

To demonstrate how little faith CalPERS has in its own published expected investment returns, when participating cities or counties try to withdraw from the pension plan, CalPERS requires them to make a deposit for future pension benefit liabilities as if their investment return was the same the current interest rate on a 30 year U.S. government bond, which is 3%. With CalPERS fairy-tale world of 30 years of consecutive investment returns of 7.5%, $1 will grow to $8.75. But $1 dollar invested for 30 years at a 3% interest rate grows to only $2.43. Conservatively, this means that CalPERS is not an unsecured creditor for $800 million, they are actually an unsecured creditor of little Stockton for the stunning amount of $2.9 billion!

Up until Judge Klein’s ruling in Stockton, unions thought that pension liabilities were a booby-prize awarded to unsuspecting taxpayers. Since unions believed pensions were “we win and you lose”, they used their immense political coffers to cajole California politicians into “spiking” pension benefits by an average of 67% over the last 14 years. In private sector bankruptcy restructurings, this robbing of a company is known as a fraudulent conveyance and is subject to “claw-back” by the court.

The average pension benefit for Stockton police and firemen who retired in the last five years is $88,091 a year, versus $70,348 a year for Sacramento police and firemen retiring over the same period. Judge Klein narrowed his eyes and suggested unsecured creditors pursue forcing CalPERS to take a hair-cut on their debt and mentioned going after pension “spiking” abuse as ways to fairly distribute losses across all creditors.

Vallejo officials now concede that they decided not to propose pension cuts in their plan of reorganization after CalPERS threatened a long and costly legal battle. But during their 3½-year bankruptcy a federal judge overturned Vallejo’s labor contracts, regarded as a precedent move. San Bernardino, which recently made an emergency bankruptcy filing after missing payroll, has told CalPERS they are going to skip the $25 million annual payment for pension contributions this year.  

CalPERS' debt that once was considered a sacrosanct obligation now looks like just one of many unsecured debts owed by Stockton, San Bernardino and hundreds of other insolvent government entities. As Judge Klein emphasized in his court transcript regarding CalPERS: “The city is going to have a difficult time confirming a plan over an objection and claim of unfair discrimination without being able to explain that problem away.” These are code words: from now on, CalPERS and retirees with pension spikes are going to be sharing bankruptcy losses just like every other municipal bankruptcy creditor. Contributed by Chriss Street.

“The American Exceptionalism Radio Talk Show”
Streaming Live Monday through Friday at 10 AM to NOON
Follow Blogs: www.chrissstreetandcompany.com & www.agenda21radio.com

Wolf here.  I would love to hear from you. You can send me an email to:

testosteronepit [at] gmail.com

I will post some of the comments, articles, corrections, points of contention, etc. under the tab “Readers Speak Up,” if I find them relevant, interesting, awesome, civilized, etc. Funny is always good.

- Include the title or link of the article you’re responding to.

- Let me know the name (alias is ok) under which you want me to publish your writing.

- If you have a blog, include a link (self-promotion is ok)

- I’ll try to send you confirmation once it’s published.

- If you DON’T want me to post your writing, if you want me to keep it private, please let me know!

- I will NEVER publish your email address!!!

- Spam, nonsense, hateful stuff, etc. will be deleted.

EmailEmail Article to Friend