Editorial: CalPERS isn't a white knight in Stockton's bankruptcy
03/27/2013 12:00 AM
03/27/2013 1:16 PM
Before it filed for bankruptcy protection last June, the city of Stockton cut its police force by 25 percent, its Fire Department by 30 percent and the workforce in all other city departments by 43 percent. The city also cut health benefits to retired city workers, slashed library hours and reduced maintenance at parks.
Then the city did something almost unprecedented in municipal government finance – it stopped payments to its creditors. These were Wall Street firms that had loaned the city millions of dollars to finance dubious downtown redevelopment projects, a new city hall and the city's pension bond.
Stockton, however, did not reduce its $29 million in annual payments to the California Public Employees' Retirement System. And that fact infuriates creditors, who believe they are being disproportionately targeted for harm in the city's petition for bankruptcy.
Bondholders and their insurers are contesting the city's effort to enter into bankruptcy. They argue the city had other options. It could have cut city employee salaries and benefits even further or trimmed services. It could have raised taxes.
But, most significantly, the city could have cut payments to the California Public Employees' Retirement System.
Federal Bankruptcy Judge Christopher Klein has set aside four days to listen to arguments from creditors, who say the city should not be allowed to enter into bankruptcy protection, and the city, which claims that it must do so to repair its shattered finances.
CalPERS has represented itself as a defender of Stockton and its workers, an artful marketing ploy. Stockton officials had asked CalPERS for a hardship funding extension to reduce current payments, easing the strain on its general fund and allowing the city to maintain vital services. CalPERS denied the request. The city then asked if it could reduce the extraordinary 5 percent annual cost-of-living increases contained in its pension contracts. CalPERS again said no.
While the retirement system could negotiate increases to pension benefits – in fact, it did so on several occasions – it could not legally reduce benefits, CalPERS maintained.
The pension system doesn't like to acknowledge it, but its actions played a role in Stockton's financial collapse. When state lawmakers expanded pension benefits in the late 1990s and early 2000, CalPERS advised the Legislature and local governments that, given surpluses existing in the pension fund at that time, the financial risks were minimal. Then came the bust of the dot-com boom, followed by the housing collapse and a global recession, saddling local governments and the state with billions of dollars in pension debt. Stockton's elected leaders overreached on several fronts, but CalPERS' rosy outlook on its investments and pension risks contributed to the city's downfall.
CalPERS has portrayed Wall Street investors as the bad guys – sophisticated financiers who bet wrong and now are not willing to accept the consequences of their bad bets. Undoubtedly, Wall Street didn't do its due diligence in buying bonds from a city facing so many liabilities. But as the court sorts out this case, it's reasonable to ask why Stockton city retirees – including highly paid former administrators – will continue to receive 5 percent-a-year cost-of-living increases when current workers are losing their jobs and services are being slashed.
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